Overall, the stress test exercise shows the significant sensitivity to market shocks for the European insurance sector. The groups seem to be vulnerable to not only low yields and longevity risk, but also to a sudden and abrupt reversal of risk premia combined with an instantaneous shock to lapse rates and claims inflation.

Three scenarios are considered:

1. Yield curve up (YCU) scenario: i) the 10- year EUR swap rate term structure would shift upwards by 85 bps and by more than 100 bps for currencies of other major advanced economies. Government bond spreads increase by 36 bps on average, reaching a maximum of 134 bps. ii) Lapse rates are assumed to increase by 20% for all non-mandatory life insurance products. iii) 2.24% higher annual claims inflation than assumed for the existing calculation of the best estimate of non-life liabilities.
2. Yield curve down (YCD): i) protracted period of extremely low interest rates. Instantaneous change of the relevant risk-free interest rate term structures, including an adjustment of the ultimate forward rate which is set at 2.04% (compared to 4.2% at the end of 2017). 10- year swap rates decline by around 80 bps in advanced economies and by around 40 bps in the emerging market economies. ii) average life expectancy is assumed to increase significantly across the entire population. 
3. Natural Catastrophe (NC): four European windstorms, two central and eastern European floods and two Italian earthquakes. 

Management actions were not allowed in the exercise. Data refer to end of 2017. The exercise covers 42 groups (75% of consolidated assets, 66% of technical provisions at the European level).

Two ratios of insurance companies are considered: assets over liabilities (AoL) and Solvency capital ratio (SCR).

In the baseline situation, participating groups have an average AoL ratio of 109.5% with an SCR ratio of 202.4%.

In the YCU scenario, the aggregate AoL ratio drops from 109.5% to 107.6%. Without the use of Long Term Guarantee (LTG) and transitional measures the impact would be more severe, corresponding to a drop in AoL ratio to 105.1% with 3 groups reporting an AoL ratio below 100% (accounting for approximately 10% of total assets in the sample). The post-stress aggregate SCR ratio remains at 145.2% with a drop of 57.2%, but 6 groups report a post-stress SCR ratio below 100%. Without the application of LTG and transitional measures, the SCR ratio would drop to 86.6%, with 21 groups reporting a ratio below 100%. 

In the YCD scenario, the aggregate AoL ratio decreases from 109.5% to 106.7%. Without the use of LTG and transitional measures, the aggregate AoL ratio would drop to 104.8% with 3 groups reporting an AoL ratio below 100% (accounting for approximately 10% of total assets in the sample). The aggregate SCR ratio drops by 64.9 percentage points at 137.4% after shock, 7 groups report a ratio below 100%. Excluding both LTG and transitional measures would lead to an aggregate SCR ratio of 85.4%, with 20 participating groups reporting a ratio below 100%.

In the NC scenario, participating groups report a drop of only 0.3% in the aggregate AoL ratio. The limited impact of the NC scenario is mainly due to the reinsurance treaties in place, with 55% of the losses   transferred to reinsurers.