A continued low interest rate environment could hit the European life insurance industry to the tune of €100bn (£84bn), a stress test by the European Union’s regulator has found.
The European Insurance and Occupational Pensions Authority has published the results of an exercise involving 236 companies from 30 countries in the European Union.
Gabriel Bernardino, chairman of Eiopa, said: “The results of this year’s Eiopa stress test confirmed the significant challenges for the European insurance sector triggered by the current macro-economic environment.
“The Stress Test 2016, conducted for the first time after the implementation of the Solvency II framework, provided indeed a ‘high-resolution’ picture of the vulnerabilities of the sector requiring particular supervisory attention.”
The regulator ran two scenarios: one in which interest rates remained low and there was entrenched secular stagnation with a lack of long-term investment opportunities.
In this scenario the excess of assets over liabilities in the EU life insurance industry would fall by €100bn (£84bn).
The second scenario – referred to as the “double hit” scenario – involved an abrupt increase in liabilities and a decrease in asset prices in a continued low interest rate environment.
Under this scenario the balance sheets of life insurers would be hit by €160bn (£134bn).
In this scenario, 104 insurers – 40 per cent of the sample – would lose more than a third of their excess assets over liabilities.
The data has been aggregated, so the results for individual firms have not been published.
But 10 UK providers took part, including Aviva, Standard Life, Prudential and Scottish Widows.
Steven Findlay, ABI assistant director and head of prudential regulation, said: "These results demonstrate the strength of the UK insurance industry and its resilience to extreme market shocks during an extended period of historically low interest rates.
"The new Solvency II regime already requires insurers to hold high levels of capital to deal with unexpected stresses, and these tests assessed a combination of extreme shocks on top of that.
"For that reason, the results are particularly reassuring for customers."
damian.fantato@ft.com
