Insurers in the European Economic Area are sufficiently capitalised to deal with the economic fallout from a “severe but plausible" amplification of geopolitical tensions. This is the conclusion drawn by the European Insurance and Occupational Pensions Authority, whose 2024 Insurance Stress Test results were published today.

The stress test subjected the group of 48 insurers to an adverse scenario marked by an intensification of geopolitical tensions with a broad range of knock-on effects. The scenario consists of a series of events whose joint materialisation is calculated to be plausible but more severe than the existing capital requirements calibration.

On top of subdued growth and higher inflation, these ripple effects include tighter financing conditions, a steeper inversion of the yield curve, widening credit spreads and a heterogenous increase of government bond yields amid concerns over debt sustainability.

These macro-level market shocks are further complemented by insurance-specific elements, such as mass lapse, claims inflation and reduced premium income.

Some 48 undertakings from 20 member states participated in the stress test, representing approximately 75% of the EEA market in terms of total assets. Eight undertakings fell below the minimum regulatory capital requirements in the fixed balance sheet approach even though they still preserved enough capital to meet their obligations to policyholders. All 8 improved their capital position with reactive management actions and managed to restore their solvency ratio above the regulatory threshold of 100%. The most frequently used management actions included selling assets, retaining dividends and raising capital through various means.

Petra Hielkema, chair of EIOPA said this year’s exercise tested a highly relevant scenario at a time when the guiding principles of global cooperation are increasingly being called into question.

“While it’s reassuring to see that European insurers are well-positioned to deal with the consequences of a further escalation of geopolitical tensions, the capital and liquidity that insurers would need to draw on to cope with such adverse shocks is substantial,” she commented. “The results therefore underscore the need for prudent risk management and close supervision given the highly uncertain times we are facing. Despite the generally positive outcome of the exercise, we must note with a measure of regret that the majority of the participants remain unwilling to disclose their individual results, which limits the transparency of the stress test.”

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