Pandemic compounds preexisting long-term risks for insurers, pension funds: EU regulator

July 31, 2020. Print article

Europe’s insurance and pension sectors face profitability and solvency concerns as the COVID-19 pandemic exacerbates low interest rates, reduced pension contributions and other risks, the European Union insurance regulator said Thursday.

After the pandemic dragged the Eurozone’s GDP down more than 12% in the second quarter, it created high levels of uncertainty within the industry, the said in its financial stability report.

“There is no doubt that the economy will experience a deep and unprecedented recession,” EIOPA Chairman Gabriel Bernardino said. “The high uncertainty on the recovery path needs to be captured by an appropriate forward-looking risk assessment.”

Insurance companies had a “solid and comfortable capital buffer” at the end of 2019 that helped them withstand the initial market shocks, Bernadino said, although the industry has since faced strong headwinds during the pandemic and has recovered from its initial market shock more slowly than other sectors.

He said the EIOPA is prepared to issue a declaration of adverse developments in the case of a sector-wide shock, which would give insurers more time to rebuild capital.

Ultra-low interest rates and yields were already a primary risk to European insurers and pension funds because of the companies’ high exposure to long-term fixed income assets — including 65% of the insurance sector’s investment portfolio. Now the pandemic may drag on these market conditions, EIOPA said.

Failing banks may become more common and would be another threat to insurers, who have high yet varied exposures to the sector.

Under banking recovery directives, “Banks cannot be ‘bailed out,’ with the exception of very large and systemically important banks,” the regulator said. “Instead, creditors have to be ‘bailed-in,’ meaning that unsecured creditors, including depositors and bondholders, are subject to the risk of facing losses.”

Other risks listed in the report include smaller pension contributions, pension funds’ large investments in the challenged equities market and credit downgrades that can threaten the value of companies’ assets.