European Insurance and Occupational Pension Authority: Environment Challenging for Insurers

6 July 2021

By David Barwick – FRANKFURT (Econostream) – Europe’s insurance companies are beset by low interest rates and various risks to the financial system, European Insurance and Occupational Pension Authority (EIOPA) said Tuesday.

In its latest financial stability report, EIOPA said that ‘[t]he macro and market environment remains challenging for the insurers’, calling low interest rates ‘the dominant narrative’ and noting the persistently negative yields on the swap curve for many tenors.

Although bond and equity markets have performed well, ‘the risk of an abrupt correction remains material’, EIOPA said.

‘Investment yields remain ultra-low, exacerbating reinvestment risks and pushing investment margin lower’, EIOPA said. Insurers’ profitability ‘could potentially be stressed’.

The steepening of the swap curve in recent months could reflect ‘positive long-term view[s] on the economic recovery after the pandemic’, while the US experience shows that ‘an increase in inflation expectations could increase yields’, though it could also be related to ‘a tilt in preference towards the equity market’, EIOPA said.

‘On the post-pandemic period, the potential recovery in demand could increase inflation in the medium term, although it is still to be clarified whether this would be a cyclical or structural effect’, it said.

EIOPA warned that if interest rates exceeded growth, countries with high debt would be at risk. ‘On the one hand, when interest rate charged on government debt remains below average economic growth, countries can manage their debt-to-GDP ratios, even without primary surpluses’, it said.

‘However, the scenario under which interest rates will be higher than economic growth could imply that countries would potentially need more than balanced budgets to sustain their debt-to-GDP ratios’, EIOPA continued. ‘Factoring in the risk of asymmetric post-pandemic recovery across countries, this development would exacerbate domestic vulnerabilities and resurface the risk of sovereign debt crises.’