Impact of ultra low yields on the insurance sector, including first effects of COVID-19 crisis

EIOPA Low yields report 2020

In the current macro-financial environment, one of the major concerns for the insurance market is the exceptionally ultra-low/negative level of interest rates.

In addition, the Covid-19 outbreak has severely affected the macroeconomic and market conditions worldwide, with the launch of support packages and monetary easing of some central banks and governments taking place to mitigate the negative effects.

The lockdowns implemented in an attempt to contain the virus outbreak have had a significant economic impact and led to the depreciation of economic outlooks for the following period. These forecasts have been surrounded by fundamental uncertainty regarding the length of the lockdowns, the confinement measures still necessary in the period ahead and the effectiveness of the policy response, hence leading to particularly large downside risks. In Europe, this was accompanied by a flight to quality, increasing the likelihood of a “low for long” scenario with adverse implications for the insurance sector.

As a result, insurers are significantly challenged in terms of asset allocations, profitability, solvency and business model adaption. The low interest rate environment was and still is, also after Covid-19, one of the main issues for the insurance market.

Given this context, the report assesses the risks and implications of the ultra-low/negative yields on the investment behaviour of insurers, considers how challenged are the profitability and solvency positions of the European insurance market and describes the impact on the insurance business models and consumers.