The European Insurance and Occupational Pensions Authority (EIOPA) published today its December 2024 Financial Stability Report in which it assesses the risks and vulnerabilities facing European insurers and occupational pension funds in a challenging risk landscape marked by high uncertainties. In addition to providing an overview of recent developments, the report also features three topical analyses that are particularly relevant in the current context. These parts of the report examine institutional investors’ exposure to real estate, the rise of asset intensive (or funded) reinsurance, and the structure of EIOPA’s framework to assess systemic risk in the European insurance sector.
Insurers and occupational pension funds, along with the rest of the world, are navigating a complex and highly uncertain geopolitical situation. Although the impact of global tensions on Europe’s financial sectors has been limited so far, underlying risks seem to be building up. As a result, the financial system is vulnerable to unforeseen events that could trigger abrupt and far-reaching changes in macroeconomic conditions.
Inflation has declined and is now hovering near the European Central Bank’s target of 2%. Interest rates have broadly decreased as well after central banks embarked on a series of rate cuts. That said, concerns are mounting regarding the European economy’s growth prospects.
Both insurers are occupational pension funds are well-positioned to absorb potential shocks. European insurers’ aggregate solvency capital requirements (SCR) ratio is well above the 100% threshold. Life undertakings had a median SCR ratio of 239.2% in Q2 2024 while the same figure for non-life undertakings stood at 212.6%. The funding ratio of occupational pension funds is also positive. Funds offering defined benefit schemes slightly increased their funding ratio from 119.8% at the beginning of the year to 120.6% in Q2.
Beyond sectoral developments and vulnerabilities, EIOPA’s Financial Stability Report also takes a closer look at three topics that are of great relevance to insurers, occupational pension funds and supervisors:
- Real estate vulnerabilities: The first topical focus dives into the risks insurers and occupational pension funds face from a languishing real estate sector. Both residential and commercial real estate prices have been negatively affected by recent developments. These include the shift to remote work in the wake of the Covid-19 pandemic, dealing a blow to office occupancy rates, and the sharp rise in inflation and interest rates, which resulted in affordability issues and lower demand. Real estate valuations suffered as a result. Although both insurers and occupational pension funds invest about 10% of their assets in real estate, EIOPA’s analysis has shown that even a strong real estate shock would only have a modest impact on the sectors, with some individual exceptions.
- Asset intensive (or funded) reinsurance: The second topic focuses on funded reinsurance, whose use and popularity has increased in recent years. Asset intensive reinsurance involves the transfer of both the investment and underwriting risks from the cedant to the reinsurer. This arrangement allows cedants to run a leaner balance sheet, which typically results in higher solvency ratios. At the same time, such deals also introduce additional credit, legal and operational risks. While the financial stability concerns related to asset intensive reinsurance appear limited for now, the concentration of this business among a few reinsurers – often with alternative business models and in specific offshore jurisdictions – warrants continued supervisory scrutiny.
- European Systemic Risk Assessment Framework (SRAF): The third and final topical focus of the report describes the methodological and organizational aspects of SRAF and presents the main sources of systemic risk identified in 2024 for Europe’s insurance sector based on 2023 year-end Solvency II data and macroeconomic and financial market data up to end-July 2024. These include increasing risks related to interlinkages between different financial actors due to a rise in the sale of credit default swaps and in the overall derivatives positions of insurers as well as emerging risks such as climate, digitalization and cyber risks that continue to be material across the European Economic Area.
To find out more about each of these topics and the general risk environment, view our Report.