EIOPA has recently (29.01.2020) published
the risk dashboard (RDB) update at January 2020.
The RDB is published on a quarterly basis, showing the level of risk for 8 (=7+1) risk categories. The latest outcome is reported in the table below, compared to the previous one (October 2019):
Some comments
- Macro risks [high, stable]
This is an overarching category affecting
the whole economy, which considers economic growth, monetary policies, consumer
price indices and fiscal balances.
The economic environment remains fragile
because of both the prolonged low interest rates, which challenge the insurance
sector, and the continuous decrease of the GDP growth. The 10-year swap rate
remains at its minimum level, despite the little increase (from 0.32% to 0.62%)
gained thanks to the recent easing of monetary policy by major central banks. The
GDP growth has been revised downwards, especially for the BRICS and the
European economy (the indicator is a weighted average over Euro Area, UK,
Switzerland, US and BRICS). The expectation on inflationary pressures remains
stable at 1.5%, because of downward revisions to forecasted inflation in the
EU, UK and Switzerland counterbalanced by upward revisions for the BRICS. The unemployment
rate remains at historical low levels (5.6%).
- Credit risks [medium, stable]
This category measures the vulnerability
to the credit risk by looking at the relevant credit asset classes exposures
combined with the associated
metrics (e.g. government securities and credit spread on sovereigns). Since the
previous assessment, CDS spreads slightly declined across all bond segments,
except for government bonds. The average credit quality step of investments remains
the same (1.83; +0.00), still corresponding to an S&P rating between AA and
A.
The exposures of the
Insurers in different asset classes remain quite stable and around
- 30.0% in European sovereign bonds, whose CDS spreads has remained
broadly stable
- 13.0% in non-financial corporate bonds, whose spreads have slightly declined
- 7.5% in unsecured financial corporate bonds, whose spreads have slightly
declined
- 3.0% in secured financial corporate bonds, whose spreads has declined
- 0.5% in loans and mortgages
- Market risks [high, decreasing]
This vulnerability of the insurance sector
to adverse developments is assessed based on the investment exposures, while
the current level of riskiness is evaluated based on the volatility of the
yields together with the difference between the investment returns and the
guaranteed interest rates. The market risks is still at high level, but shows a
decreasing trend due to a lower expected volatility for the market bonds,
largest asset class (60% of exposure), opposed to an increased volatility of
the equity (6%) and property (3%) market. CDS spreads declined slightly across
most bond segments, except sovereign bonds, with credit risks remaining at
medium level.
- Liquidity and funding risk [medium, stable]
The vulnerability to liquidity shocked is
monitored measuring the lapse rate, the holding in cash and the issuance of
catastrophe bonds (low volumes or high spreads correspond to a reduction in the
demand which could forma a risk). The median liquid assets ratio has increased from
65% to 66%, 66%, but the lower tail of the distribution has slightly declined.
The average ratio of coupons to maturity has decreased, as well as the issued
bond volumes (5.8bln euro, -0.5bln). Lapse
rates in life business are broadly stable, showing a median lapse rate around 2.6%.
- Profitability and solvency [medium, stable]
The solvency level is
measured via Solvency Ratio (SR) and quality of Own Funds (OF), while the
profitability via return on investments and combined ratio for the life and
non-life sectors. SR for both groups and non-life undertakings have declined
across the whole distribution, due to the prolonged period of low interest
rates together with a lower expected profit in future premiums, showing a
further decline for life undertakings (160%, -5%).
- Interlinkages and imbalances [medium, increasing]
Interlinkages are assessed
between primary insurers and reinsurers, insurance and banking sector and among
the derivative holdings. The exposure towards domestic sovereign debt is considered
as well. The risks shows an increasing trend due to higher SII of interest rate
swaps (the largest derivative exposure), potentially driven by ALM strategies
put in place as a response to the low interest rates. in the share of
The median share of premiums
ceded to reinsurers remains stable at 5.6%, as well as the median exposure to
domestic sovereign debt (12.5%). Insurance groups’ investments in banks (12.4%),
insurers (1.4%) have remained broadly unchanged, while investments in other
financial institutions have declined (20.1%, -0.8%).
- Insurance (underwriting) risk [medium, stable]
Indicators for insurance risks
are gross written premia, claims and losses due to natural catastrophes. Year-on-year
premium growth for both life and non-life business is positive and shows an
increasing trend. The catastrophe loss ratio has increased (7.9%, +2.9%) because
of Typhoon Faxai and Hurricane Dorian, happened in September, and is expected
to increase again in the last quarter due to the costliest natural disaster of
the year, Typhoon Hagibis, which hit Japan in mid-October. Insurance loss
ratios have remained broadly unchanged, with the median value placed at 63% and
the distribution slightly moving upward. Median premium growth has increased (from
3% to 6.8%) in life business and is stable (median at 4.3%) in non-life
business.
- Market perception [medium, stable]
The market perception remains constant at
medium level. The quantities assessed are relative stock market performances
(insurance life / non-life stocks has respectively outperformed /
underperformed the Stoxx 600), price to earnings ratio (median increased from
11.3% to 12.5%), CDS spreads (median value stable at 64.3bps) and external
rating outlooks (unchanged from the last quarter).
