EIOPA financial stability team leader discusses the coronavirus (COVID-19) crisis

EIOPA financial stability team leader discusses the coronavirus (COVID-19) crisis

The European Insurance and Occupational Pensions Authority (EIOPA) has published details of an interview of its financial stability team leader, Petr Jakubik, with the XPRIMM publication. Jakubik discussed the most challenging effects of the coronavirus (COVID-19) pandemic in the insurance business, the financial stability of the industry, expectations for coming months and lessons learned from this ‘special situation’. In particular, he highlighted the benefits of the Solvency II regime in enabling insurers to withstand the pandemic and the regime’s ‘first successful real-life crisis test’.

Jakubrik commented that the most challenging effects of the pandemic in the insurance business were ‘risks that were new’ and where previous experience was more limited. These included lockdown-related events such as business interruptions and a significant increase in cyber risks, an area in which risk assessment models and available data are still quite scarce. However, Jakubrik felt that cyber risk must also be seen as an opportunity for the insurance sector due to cyber underwriting policies, notwithstanding the need for appropriate risk management in offering these products.

Jakubrik felt that European insurers were able to withstand the pandemic and that, in particular, the Solvency II regime helped them to ‘better align capital to risk, build-up resilience and enhance their risk management practices.’ The resilience was aided by that fact that the (re)insurance industry as a whole entered the crisis with very high solvency ratios and generally ‘in a good condition’. He said that ‘Although the industry might still face some consequences of the crisis, such as potential financial market corrections or increased credit risk when certain protective fiscal measures run out, the likelihood of any major failure has significantly decreased.’ He highlighted EIOPA’s current insurance stress test, which is designed to provide further insight into insurers’ vulnerabilities, and EIOPA’s role in continuously monitoring market developments to be able to address potential financial stability risks before they materialise.

In terms of elements which could threaten the insurance industry’s financial stability on a large scale, Jakubrik warned that: 

• potential increased unemployment and corporate credit downgrades could negatively impact the sector. This could lead to losses in prices of equities, bonds and other assets

• one of the key risk transmission channels for potential increased credit risk could be the interconnectedness between European insurers and the banking sector. This is due to the fact that banks will be exposed to the expected increase in non-performing loans once coronavirus-related fiscal measures lapse

• financial market valuations seem to be overly optimistic—a view supported by accommodative monetary policies. However, tapering bond purchases and eventual interest rate hikes by central banks may lead to financial market corrections 

He noted that the main risks are related to the macroeconomic situation, including: the risk of potential financial market corrections that could be caused by higher inflation, sovereign debt sustainability concerns, increased credit risk related to the phase-out of fiscal measures, risk related to the real estate market and emerging risks such as cyber and climate related risks. 

Jakubrik stated that the coronavirus period could definitely be seen as ‘the first successful real-life crisis test of the Solvency II regime’. He noted that the end of the crisis will allow time to analyse the lessons learned and that some have already been reflected in the proposals for the Solvency II review. He highlighted EIOPA’s recommendation that supervisors have additional powers, including a macroprudential toolkit to tackle systemic risks—such as restrictions on the distribution of dividends to preserve insurers’ financial position in periods of extremely adverse developments. Another point highlighted by the crisis was the critical importance of co-ordinated approaches among national competent authorities. 

Source: European insurers during the COVID crisis  

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