EIOPA observes that the risks identified in the previous Report remain broadly unchanged: a weak macroeconomic environment, protracted low interest rates and increased credit risks continue to affect the (re)insurance and occupational pension sectors of the European Economic Area.
The current quantitative easing (QE) policy in the euro area may create favourable conditions for insurers and pension funds in the long run provided that economic growth improves. However, in the short-term, QE has further lowered the risk-free rate and, thus, put an additional pressure on certain insurers’ and pension funds’ business models.
Furthermore, the QE programme might significantly reduce market volume for some asset classes. In such circumstances, the herding behaviour of investors related, for example, to a deteriorating geopolitical situation, could trigger a risk reversal or “double-hit” scenario.
In the insurance sector, returns and profitability of products remain under strong pressure with a potential negative impact on solvency.
In the reinsurance sector, risks arising from the low yield environment may urge the reinsurance industry to further consolidate. Reinsurance premiums have been pressurised as companies face continuing competition from non-traditional sources of capital.
The occupational pension funds sector increasingly faces challenges as well. Defined Benefit plans are negatively affected by declining interest rates, in much the same way as guaranteed return insurance products. The future income of Defined Contribution schemes is also under constraint.
Financial Stability Report May 2015
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