EIOPA publishes 2020 insurance stress test results
EIOPA today set out the results of its 2020 insurance stress work and related Solvency II review, including proposals that would raise average SCRs across Europe and adjust key market risk parameters.
The European Insurance and Occupational Pensions Authority published its final opinion on the 2020 Solvency II review on 17 December 2020, outlining reforms that are expected to increase the Solvency Capital Requirement by an average of 12% across Europe, phased in over five years. EIOPA suggested that this smoothed introduction should apply as long as interest rates remain below 0.5%.
Within the market risk framework, EIOPA proposed revising the symmetric adjustment that applies to the equity risk charge in the Standard Formula so that it is capped within a band of plus or minus 17%, compared with the previous plus or minus 10%. The authority also proposed reducing the correlation parameter between the interest-rates-down stress and spread risk to 0.25, changing how these two key drivers of balance-sheet volatility interact in the Standard Formula aggregation.
The December 2020 Financial Stability Report assessed financial stability risks and vulnerabilities in the European insurance and pension sectors, providing the macroprudential backdrop to the stress and review work. EIOPA also delivered what it described as its last Long-Term Guarantees report in December 2020, closing out a multi-year series of analyses on the impact of LTG measures on insurers’ solvency positions.
Milliman, founded in 1947 and operating as an independent firm with offices in major cities worldwide, published an analysis of EIOPA’s final opinion on the 2020 Solvency II review later that month. The consultancy noted EIOPA’s recommendation for a smoothed implementation of the revised framework while policy rates remain below the 0.5% threshold.
--- Sources: EIOPA Financial Stability Report, December 2020 EIOPA background analysis and LTG report, December 2020 Hymans Robertson Solvency II 2020 review newsflash, December 2020 Milliman, “Solvency II 2020 Review – EIOPA’s final opinion”, 29 December
