Systemic risks in the EU insurance sector

On 16 December 2015 the European Systemic Risk Board (ESRB) published a report on systemic risks in the EU insurance sector.

The ESRB underlines that insurance sector plays and important role in the economy. Its assets are worth two thirds of the European Union GDP. Insurers in the euro area hold market shares of more than 10 % in the markets for long-term bank debt and home sovereign debt.

The ESRB identified the main ways in which insurers and re-insurers can be the source of systemic risks and amplify these:

• “Insurers can amplify shocks owing to their involvement in so-called non-traditional and non-insurance activities such as, for example, speculative derivative transactions. • Certain asset allocation behaviour such as sales of assets in downturns may have a pro-cyclical impact, thus aggravating already falling prices.
• Life insurers in parts of Europe could create disruption by failing collectively under a scenario with prolonged low risk-free rates and suddenly falling asset prices (“the double hit”). Insurance guarantee schemes and recovery and resolution arrangements, currently in place at national level, are unlikely to be fit to handle such a scenario. From a shorter-term perspective, this is in fact the most imminent risk under the current economic conditions.
• Under-pricing by an insurer, if left unnoticed in microprudential supervision, could lead to a lack of substitutes in those classes of insurance that are vital to economic activity.”

The ESRB also analysed incentives in prudential regulation, in particular Solvency II. It will generally increase capital and reserving requirements. However, the ESRB puts a question whether additional tools are needed for macroprudential authorities to deal with systemic risks of the EU insurance sector.