Lug 262018

EIOPA launched its fourth union-wide exercise with the aim of assessing the resilience of the European insurance companies against adverse scenarios which can trigger systemic risk and threaten the stability of the European financial markets and the real economy.

The target sample encompasses 42 insurance groups (the first 30 and 12 additional others supervised by different NCAs), for a total coverage close to 78% of the consolidated Assets according to the SII Financial Stability reporting.

The Stress Test (ST) does not represent a “pass” or “fail” exercise, but rather a full bottom up calculation to assess the impact of three adverse scenarios to the insurance groups Balance Sheets (BS), Own Funds (OF) and Solvency Capital Requirement (SCR), with reference date 31.12.17. The set of templates to report these results are broadly based on the SII QRT reporting and will be partly disclosed upon the consent of the participating groups.

Participating groups are requested to submit the filled in templates to the NCAs by the 16th of August and quality checks and benchmarking will be carried out by the supervisors until end October, with the aim of disclosing the results by the second half of January 2019.

In the 2018 ST exercise:

  • the shocks are instantaneous and applied to the entire in force business at the reference date
  • the shocks levels for sovereign or corporate yields refer to a change in the total yield, and changes to the risk free yields (swaps) have to be considered too when calculating the credit spreads
  • shocks on the underwriting risks have to be applied after the market ones and, in case the lapse/longevity shocks imply a positive impact on the SII OF conditional to the situation after the application of the market ones, their impact has to be capped to 0 (only groups take part to the exercise)
  • the consolidation of the results for the group BS after stress shall be in line with the base
  • participations in not-insurance entities and related undertakings held by the group shall be stressed according to the shock prescribed to the stock prices
  • measures like mitigating strategies that rely on taking future actions after the reference date should not be considered
  • the look through approach shall be applied
  • for what concerns the SCR calculation, approximations and simplifications can be used considering the trade-off between feasibility and reliability, and all the simplifications shall be discussed with the group supervisor and cannot include the calculation of Loss Absorbing Capacity of Technical Provisions (LACTP) and Deferred Taxes (LACDT)
  • for what concerns the Risk Margin (RM) recalculation, scaling approaches can be used to derive the post stress RM according to the change in BEL
  • the Long Term Guarantees (LTG) and Transition measures applied at the reference date shall be applied in the stressed situations too and the impact calculated; the impact of the latter on the TP shall be calculated in the base scenario, approved by the NCA and kept constant in the stressed scenarios.

Three adverse scenarios are proposed, along with a questionnaire on the exposure to the cyber risk:

[1] YC up + LAPSE up + inflation pressure (that causes a provision deficiency)

This scenario is characterized by an upward shift in the risk free rates as well as a significant increase in inflationary pressure, followed by a large share of policyholders who surrender. An abrupt fall in the global asset prices puts in trouble the insurers that are large investors in government and corporate bonds, equity and real estates:

  • the swap yield with 10y maturity increases by 85bps in the EU
  • the spread of a 10y government bond increases on average by 36pbs, reaching a maximum of 134bps; yields on corporate and bank debt increase too and in larger measure
  • stock prices in the EU decline by about 39%, equity by 33%, real estate by 41% and residential and commercial real estates by 20% and 31% respectively
  • overall expenses and costs increase strongly because of the inflation pressure
  • an instantaneous shock of 20% of the lapse rate shall be applied in place of the best estimate to all products types (but mandatory), overruling the potential dynamic adjustment generated by the market shocks
  • the annual claims cost of non-life insurers increases by 2.24%

[2] YC dw + LONGEVITY up

This scenario is characterized by a protracted period of extremely low interest rates (including an adjustment to the UFR) in conjunction with a significant increase in the average life expectancy:

  • the swap yield with 10y maturity decreases by 80bps in the EU
  • the spread of a 10y government bond declines on average by 36pbs, spanning from 49 to 17bps; yields on corporate bonds decrease too, increasing the spreads
  • stock prices in the EU decline by about 16%, equity by 6%, real estate by 18% and residential and commercial real estate remain unchanged
  • consistently to the methodology recently suggested for the review of the SF, a relative change of -15% shall be applied to the best estimate mortality assumptions independently of the age and the type of product


This scenario is characterized by multiple catastrophic events for windstorm (4), floods (2) and earthquakes (2) to be considered as separate events for reinsurance recoveries. Management actions such additional reinsurances cannot be considered and insurers may therefore suffer from exhaustion of the reinstatement provisions of their reinsurance treaties



The questionnaire aims at gathering information on the current situation, the existing approaches and the best practices to deal with the cyber risk, that has climbed to the top positions in the list of global risks for businesses as a consequence of the digital transformation going on lately. Insurers have to check their definition of cyber risk against a benchmark and have to analyse its impact in terms of frequency and economic loss in the last four years (cyber risk is usually classified as operational risk, linked to a deliberate exploitation of computers systems and networks). They finally have to collect information on the exposures held in underwritten portfolios, split between “affirmative” (coverage explicitly included) and “not affirmative” (coverage not explicitly excluded, i.e. “silent”).


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