Eiopa scrutinises insurers’ capital and liquidity amid inflation
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Europe’s insurance watchdog is “closely monitoring” the capital and liquidity position of EU insurers to ensure policyholders are protected under the current economic climate.
Petra Hielkema, chair of the European Insurance and Occupational Pensions Authority, said following Russia’s war with Ukraine, “we are at an economic juncture driven by high inflation and uncertain economic growth”.
She said the impact of this on the insurance sector “has been minimal”, but secondary effects are becoming increasingly visible, as consumers are experiencing the effects of the cost of living crisis.
Europe’s insurers manage assets worth more than €10tn (£8.7tn), she said at a hearing of the Economic and Monetary Affairs Committee of the European Parliament yesterday.
For life business alone, Hielkema said in Europe more than 97m new contracts were written in 2021, bringing the total size of the life market to close to 660m contracts, equalling €578bn in gross written premiums.
For pensions, she said there were 150,000 pension funds active in the EEA, with assets close to €3tn.
Hielkema stressed they provide a “means to channel the funds of millions of small savers into sustainable investments”.
“We are therefore closely monitoring the economic situation and the capital and liquidity position of EU insurers and institutions for occupational retirement provision, using all of our instruments to do so.”
US insurers lose more than $200bn on fixed income
Eiopa's decision to scrutinise EU insurers came after US publicly traded insurers reported more than $200bn (£176bn) of unrealised losses on their fixed income portfolios in the second quarter of 2022, according to ratings agency AM Best, as rising interest rates have diminished bond values.
For life insurers and annuity providers, with their longer portfolio durations and the need to match with their lengthier duration liability profile, the agency said the impact was more significant.
AM Best noted since the insurance industry generally operates on a hold-to-maturity investment strategy, the losses “are not a major problem unless they become realised”.
But it said although insurers have improved their liquidity since the initial shock of the Covid-19 pandemic, and additional liquidity can be tapped via avenues such as the Federal Home Loan Bank, companies that need to sell assets to meet cash flow requirements will be the most impacted, as they will have to sell their bonds at a “deeply discounted price” to meet liability payments.
“Companies in runoff and winding down assets without a revenue source also may be more vulnerable than currently operating insurers,” AM Best added.
Insurers tend to allocate significantly to fixed income – is it time for change?
