4 July 2011 – Frankfurt
The EIOPA stress test results published
These stress tests were based on data as at YE2010 and were designed to assess the overall stability and resilience of the EU insurance sector to major shocks of the insurance market under four stressed scenarios: Baseline, Adverse, Inflation and Sovereign Stress (see Annex 1 for a detailed description of each scenario).
As it was based on YE2010 data and looks at the impacts on a Solvency 2 view of capital, it represents something of an update on the QIS5 results which were based on YE2009 data.
EIOPA commented that the overall capital position of the European insurance sector remains robust in the presence of these predefined shocks.
The main vulnerabilities of the sector were identified as adverse developments in yield curves, sovereign bond markets and equities. This highlights the risk to the insurance industry from potential sovereign default and contagion. Government bonds (in various currencies and issued from many countries) are key for matching long-term insurance liabilities given the available duration of these instruments, the existence of indexed government bonds and their perceived credit strength.
Graph 1: Surplus above the MCR under various economic scenarios
EIOPA noted in its report that even under the adverse scenario only 10% of companies fell below their MCR. Given that capital exists in the first place to protect against shocks like these, we believe that this is a good result. Furthermore, of those companies that fell below the MCR in the adverse scenario, the aggregate amount by which they fell short was only €4.4bn or 1.6% of the ‘post-shock surplus’ so the industry as a whole is well positioned for these shocks.
* The Solvency Capital Requirement (SCR) is defined as the potential amount of own funds that would be consumed by unexpected large events whose probability of occurrence within a one year time frame is 0.5%. This definition based on a probability measure allows (and sometimes mandates) the replacement of all or part of the standard formula with an internal model,” when this can be shown to be better able to fulfil the directive requirements in relation to an undertaking’s particular risk profile. EIOPA points out though that individual internal models have not been approved yet to calculate the capital requirements under Solvency II.
** The Minimum Capital Requirement (MCR) is defined as the potential amount of own funds that would be consumed by unexpected events whose probability of occurrence within a one year time frame is 15%. In order to ensure the smooth functioning of graduated supervisory intervention (often referred to as “the ladder of intervention”), the linear result produced by the MCR calculation is bounded between 25% and 45% of the SCR, subject to an absolute minimum.
The results of the original QIS5 (the fifth Quantitative Impact Study) were announced in March by EIOPA (the European Insurance and Occupational Pensions Authority). The study ran to assess the impact of new approaches to asset and liability valuations and capital setting under Solvency II – which will apply to insurers from January 2013.
