Insurance & Asset Management Update – April
EIOPA on coronavirus impact on the EU insurance sector
The European Insurance and Occupational Pensions Authority (EIOPA) issued a statement addressing the business and solvency position of the European insurance market. No ground-breaking measures, nevertheless, we summarised some interesting items:
- National competent authorities (NCAs) are instructed to be flexible in the timing of supervisory reporting
- For the near future EIOPA will also limit its requests for information and consultation
- The deadline for the information request on the 2020 review of Solvency II (Holistic Impact Assessment) is postponed by two months to 1 June this year
- The statement emphasizes that the Solvency II framework also includes several tools that can be used to mitigate risks and impacts to the sector. EIOPA and the NCAs stand ready to implement these tools, if and when necessary
Please contact Lennard Beijering or Nicolas Ziob for more information about potential consequences of the virus in the insurance sector.
IFRS 17 to take effect in 2023
In March 2020, IASB discussed the amendments regarding the effective date of the accounting standard IFRS 17. It was tentatively decided to defer the implementation by two years to 1 January 2023. Furthermore, it was also agreed that insurers start to report under IFRS 9 at the same effective date.
EIOPA publishes principles on stress testing
The methodological paper published at the beginning of March covers, amongst others, the process, scope, scenario design and shock calibration of insurance stress testing. Scenarios are based on a narrative and determine the goal of the exercise. It is concluded that scenarios should be backward and forward looking. Additionally, an approach consistent with solvency II is achieved by stressing the ultimate forward rate after the term structure is shifted. Shocks are generated for all typical products on an insurer’s balance sheet. The scenarios are then constructed by analysing the joint event distribution following a single or multiple financial variable shock.
Effects of low-interest rates on insurance
EIOPA also increases their focus on the low-interest environment, as indicated in their supervisory statement. Preliminary observations of an extensive analysis in Q2 2019 are:
- Insurers move slightly towards non-traditional investments, such as unlisted equity, while also buying bonds with negative yields
- Cashflows stemming from government bond portfolio could drop by 50% over the coming 10 years due to reinvesting at significantly lower yields
- These reinvestments will also slowly decrease the interest income in the coming years, whereas it has been stable for the past 3 years
- Insurers might not accumulate enough capital to counter the increase in value of insurance liabilities caused by discounting at a lower rate as time passes (UFR-drag). This risk increases substantially in an enduring low yield environment
DNB insurance outlook
Aligned with EIOPA, the Dutch Central Bank (DNB) published their supervisory outlook also focusing on the impact of low interest rates for insurance companies. Additionally, they expect a continuing enter of private equity in the industry. This will also drive the change to more digitalisation, technical innovation and sustainability. DNB wants to monitor the resulting risk from these changes, such as being hacked and the use of artificial intelligence.
Please contact Martijn de Groot or Lennard Beijering for more information about insurance regulation, stress testing or coping with the low-interest rate environment.
IOSCO publishes 2020 annual work program, identifying its core objectives
The Board of the International Organization of Securities Commissions (IOSCO) has published the annual work program for 2020, which identifies the following priorities for this year:
- Corporate Debt and Leveraged Finance, where IOSCO will assess the potential resulting risks in capital markets
- Crypto-Assets, for which IOSCO has published a report discussing the key considerations for regulating crypto-asset trading platforms
- Market fragmentation in securities and derivatives markets, where IOSCO plans to intensify its efforts to propose steps to further strengthen cooperation between regulatory authorities and assist regulators in addressing the adverse effects of market fragmentation
- Artificial Intelligence and Machine Learning (AIML), IOSCO will continue working on proposed guidance for regulators on potential issues when regulating companies that apply AIML
- Passive Investing and Index Providers, where IOSCO is analysing the impact of the growth of passive investing on equity capital markets, among others looking at market efficiency and corporate governance
- Retail Distribution and Digitalization, where IOSCO intends to come up with policy measures, which address and mitigate the risks posed by online cross-border marketing and distribution
In addition, IOSCO will keep focusing on systemic risk in capital markets.
Please contact Martijn de Groot or Bas van Oers for more information about advancements and arising risks within the capital markets.