Sovereign credit risk and the lack of a definite and comprehensive political response to the eurozone debt crisis are the main threats to the financial stability of the European insurance sector going into 2012, the European Insurance and Occupational Pensions Authority (Eiopa) has warned in its latest financial stability report.
The authority concluded that the risk environment had deteriorated further in the six months since the publication of its interim report earlier in the year.
Eiopa warned that if the policy responses to the eurozone crisis remained unconvincing to financial market participants, the European insurance and occupational pension sectors could be “severely and adversely affected by the resulting financial and economic reality”, threatening the solvency of some insurers.
“No insurance company is shielded from developments in the real economy and, even with a political resolution to the current crisis, the industry will face challenging headwinds cast by the recessionary economic tendencies observed in most of Europe today,” the report said.
It was not only financial market data and political uncertainty that cast a dark shadow on the near-to-medium term outlook for the European insurance sector, but also the economic assessment provided by local insurance regulators, Eiopa added.
A survey of insurance supervisors conducted by Eiopa found the current sovereign debt crisis, a downturn of the economic cycle and regulatory and reporting changes were seen to pose the greatest threats to the insurance industry.
For each of the three risks the probability of each materialising was considered substantial by supervisors. The potential impact on the insurance sector was expected to be highest for sovereign risk and for the recession.
In addition, further downward pressure on equity prices and a prolonged period of low interest rates (see box) were also ranked highly as risks for the insurance sector.
Insurance supervisors expected the risks associated with regulatory and reporting changes, equity risk and economic risk to increase significantly over the next 12 months.
“The risks for the insurance industry are at high levels, and are more pronounced than the first half of 2011. The risks stemming from exposures to sovereign and banking debt as well as the macroeconomic outlook are the main factors, which may jeopardise the financial stability of the European insurance and occupational pension sectors going into 2012,” Eiopa said.