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EUROPEAN INSURERS SHOW RESILIENCE IN LATEST STRESS TEST
Thursday 14 July 2011
Author: Russell Group
 

As fears that Ireland and Italy will become the latest countries to see their sovereign debt ratings collapse rating firms Moody’s says the results of the recent insurance stress tests show the underwriters are still showing surprising resilience.

The European Insurance and Occupational Pensions Authority (EIOPA) has announced that 90% of all participants in its second European insurance stress test continue to comply with minimum capital requirements under the forthcoming Solvency II requirement in all stress scenarios.

Commenting on the announcement Dominic Simpson, Vice President - Senior Credit Officer, at Moody's described the results are “credit positive, showing the sector remains resilient to stress”.

He added: “To evaluate the overall stability of the European insurance market, EIOPA tested the ability of insurers and reinsurers to meet future Solvency II Minimum Capital Requirements (MCR), a breach of which would lead to withdrawal of authorisation, under four stress scenarios. As measured by gross premium income, 60% of the overall European insurance market participated. We suspect the other 40% are smaller and less diversified businesses more disposed to stress-test failure.

“Using year-end 2010 data, participants were subject to distinct baseline, adverse, and inflation scenarios, and a supplementary test to evaluate sovereign bond exposures not captured in the other scenarios.”

Mr Simpson: “On an aggregate basis, the MCR solvency ratio starts at 380% and falls to 320% in the baseline scenario, 281% in the adverse scenario, and 342% in the inflation scenario. Only 9% of the insurers failed to meet theMCR in the baseline scenario, 10% failed the adverse scenario, 8% failed the inflation scenario and 5% failed the sovereign scenario. The fail rates are similar to the results shown in the March 2011 QIS5 (industry evaluation of proposed Solvency II regulation), which showed around 5% of insurers falling below MCR, and broadly comparable to those from the European banking industry in July 2010.”

Moody’s said participating insurers’ main vulnerabilities were yield curve and sovereign bond risk, and a higher-than-expected rate of severe natural catastrophes combined with limited recourse to reinsurance facilities.