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European Insurance and Occupational Pensions Authority
News article11 December 2023

EIOPA’s financial stability report weighs up insurers’ and pension funds’ challenges amid shifting macro landscape


The European Insurance and Occupational Pensions Authority (EIOPA) published today its December 2023 Financial Stability Report, which explores the challenges the shifting macroeconomic landscape poses for insurers and pension funds. In addition to covering key developments in the sectors, the Report includes four topical focuses on specific areas of interest. These delve into topics ranging from the liquidity position of insurers and changes in their investment behaviors in the new macro environment to the impact of derivate margin calls on the liquidity position of occupational pension funds.

The events of the past years have profoundly transformed the economic environment and present insurers and pension funds with considerable challenges.

The resurgence of inflation risks and central banks’ response to rising prices has decidedly reversed a four-decade-long trend of falling interest rates. Yields for 10-year German government bonds rose from -0.18% at the beginning of 2022 to 2.84% in early October 2023.

While higher interest rates hold the promise of increased investment income for insurers and pension funds in the long term, they also entail coping with losses on existing fixed-income portfolios in the short term. Life insurers, in particular, may also face higher surrender rates and lower new business as consumers may opt for non-insurance investments with higher perceived returns.

The combination of geopolitical uncertainties, higher refinancing costs and reduced disposable household income due to inflation might tip the EU economy into recession in the coming months.

EIOPA’s Financial Stability Report takes a close look at four topics that are of particular interest for the sectors in these challenging times:

  • Liquidity risks for the insurance sector: Liquidity risks have only recently come into the focus of insurance and pension funds supervisors. The 2022 Gilt crisis and the turmoil surrounding US regional banks earlier this year underscored the importance of liquidity monitoring.  EIOPA’s survey of solo undertakings shows that their aggregate liquidity position deteriorated in 2022 mainly due to the drop in the value of bonds. The limited number of insurers that forecasted negative cash flows in 2023 had enough liquid assets to cover the shortfall.
  • Portfolio rebalancing after monetary normalization: The second article analyzes whether insurers are readjusting their portfolios towards traditional fixed-income investments amid rising interest rates. The low-interest rate environment of the past decade saw insurers search for yields in alternative investments like real estate, private equity funds and loans. Contrary to expectations of a return to traditional investments following the normalization of monetary policy, insurers so far have shown no signs of moving back into fixed income and their investments in alternative assets continue to rise.
  • Liquidity needs of occupational pension funds on interest rate derivatives: The third section investigates the liquidity needs resulting from margin calls on interest rate derivatives that institutions for occupational retirement provision (IORPs) faced amid the rapid rise of interest rates in 2022. The analysis shows that IORPs had to pay substantial amounts of variation margin in the first three quarters. Derivative users liquidated substantial amounts of equity as well as investments in equity, bond and money market funds, resulting in net sales of approximately €151 billion.
  • Impact of past recessions on insurers and lessons for the future: The final article analyzes the historical impact of past recessions on financial markets, insurers' profitability, and their valuation in equity markets. This can provide lessons for the potential effects of the next recession.

Go to the Financial Stability Report


Publication date
11 December 2023