EIOPA published a report highlighting the major sources of systemic risk in insurance. Sources of risk are distinguished among direct sources (exposure to common macroeconomic and financial shocks) and indirect sources, encompassing activity-based risks (such as network-type involvement in dangerous products) and behaviour-based risks (such as excessive concentrations and inappropriate cross-exposures).
EIOPA’s stated objective is to discourage risky behaviors and excessive levels of exposure, particularly in systemic-risk bearing products. The guidelines distinguishes microprudential policy (bottom-up approach) from macroprudencial policy (top-down approach).
Correlations among institutions is irrelevant for micro-prudential policies, and EIOPA guidances are developed at a single-company level, focusing on a stacked level of reserves that might help to absorb risks at a micro-level.
In order to measure spillover effects across all companies, a mixed approach, i.e. based both on fundamentals and market indicators, is proposed. Tackling the issue of systemic risk is currently of primary interest, as macro-prudential policies in the insurance market appears to be still in their early stage.