EIOPA carries out regular insurance stress tests to assess how well the European insurance industry is able to cope with severe but plausible adverse developments of financial and economic conditions. Stress test results help supervisors identify the vulnerabilities of the insurance industry and find ways to improve its resilience. The 2024 stress test exercise focuses on economic consequences of a re-intensification or prolongation of geopolitical tensions. It evaluates the impact of such a scenario on the capital and liquidity position of European insurers.
Objective
Although the 2024 exercise has a primarily microprudential approach, it is not a pass/fail exercise. Rather, the findings allow EIOPA to make recommendations to the industry and enable supervisors to discuss with insurance undertakings remedial actions as necessary in order to improve their resilience.
The microprudential assessment is complemented by the estimation of potential spillover from the insurance sector to other parts of the financial system triggered by reactions to the prescribed shocks.
Scenario
The 2024 stress test exercise focuses on the economic consequences of a re-intensification or prolongation of geopolitical tensions.
The scenario, developed in cooperation with the European Systemic Risk Board (ESRB), envisages a widespread resurgence of supply chain disruptions, leading to lower growth and higher inflation. Second-round effects stemming from a wage-price spiral would further exacerbate inflationary pressures, ultimately leading to a re-appraisal of market expectations of interest rates across tenors and currencies. Concerns about the persistent effects of severe adverse shocks are reflected in a larger increase of expected market rates at the short end of the yield curve than at the long end. This contributes to a further inversion of the yield curve. Despite expectations of decreasing inflationary pressures over time, growth will continue to be adversely affected. The resulting tightening of financing conditions would heterogeneously increase government bond rates and would weigh on corporate profitability, widen credit spreads and have a negative impact across other asset classes.
Market and insurance specific shocks derived from the narrative are calibrated to be severe but plausible and affect both the asset and liability side of the balance sheet of insurers as well as their liquidity in- and out-flows.
For detailed information on the scenario and on the shocks, see the ESRB Adverse scenario for the EIOPA Insurance Stress Test 2024, the Technical information and in the Technical specifications.
Methodological approach
The 2024 Stress Test exercise assesses the resilience of the European insurance industry from two distinct perspectives:
- a capital assessment, which relies on the Solvency II framework; and
- a liquidity assessment, based on estimations regarding the sustainability of undertakings’ liquidity positions.
Insurance undertakings participating in the stress test are requested to estimate their position under two assumptions:
- Fixed balance sheet, where only embedded management actions are allowed;
- Constrained balance sheet, where a set of identified reactive management actions are allowed.
Scope
The 2024 exercise targets European insurance entities based on the following criteria:
- Large groups in the first place; and
- Additional entities (groups and/or solos) to enhance the scope at the national level.
The target sample for the capital component as defined in cooperation with the National Competent Authorities encompasses 48 undertakings registered in 20 European jurisdictions. The sample covers 75% of the EU-wide market based on Solvency II total assets.
The list of the undertakings in scope of the 2024 Stress Test exercise is available in the Technical Specifications.
Working process
Preparation phase
EIOPA has consulted relevant stakeholders and participants during the preparation of the stress test package.
- In mid-January, EIOPA carried out technical discussions with stakeholders (Insurance Europe, AMICE, CRO Forum, CFO Forum, Actuarial Association of Europe);
- In mid-February, EIOPA carried out consultations with participants in the form of Question and Answers to provide clarifications and improve the stress test package, allowing participants to submit their replies in writing.
Calculation phase
From the launch of the exercise on 2 April 2024 until the deadline for the submission of the results to the National Authorities in mid-August 2024, participants are requested to calculate the results according to the prescribed scenarios.
Q&A phase
The process will take place from 3 April 2024 for four weeks and aims at ensuring a clear and shared understanding on the application of the shocks and of the reporting requirements. Participating entities are invited to send questions to the EIOPA Q&A workstream via the national supervisory authorities (link) using the specific template (link) at any time during the Q&A process. The deadline for the submission of questions is 29 April 2024. The list of the questions and related answers will be published on the specific area at the bottom of this page on a weekly basis.
Validation phase
From Mid-August to end October 2024: Quality assurance of the results with the envisaged process following a two-step approach divided into i) local quality assurance step and ii) central quality assurance step. During the validation period, participants might be requested to provide clarifications or resubmit part(s) of their results.
Analysis of the results
October to mid-December: analysis of the results and drafting of the report.
Publication of the results
The outcome of the 2024 Stress Test will be published in December in two forms:
- Report based on aggregated data;
- Publication of individual results relating to a subset of capital-based indicators (subject to the consent of the relevant entity).
For individual results, the indicators will reflect the impact of the stress scenario on the whole balance sheet position of the participants, but also on total assets and technical provisions separately, comparing the movements between baseline and both fixed and constrained balance sheets. More specifically, the following set of indicators will be used:
- evolution of the ratio of assets over liabilities, and the relative change in the excess of assets over liabilities;
- relative change in total assets, but also across main asset classes (i.e., equities, government bonds, corporate bonds, property, loans and mortgages, CIUs and assets held for UL/IL);
- relative change in total technical provisions, and the corresponding movements for life, non-life and UL/IL portfolios.
The indicators and their descriptions are available in the templates for the data collection – capital component (Tab “I.Indicators”) in the 'Reporting templates' section of the page.
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