The European Insurance and Occupational Pensions Authority (EIOPA) is launching today its 2024 stress test in which it subjects insurers in the European Economic Area to a hypothetical scenario of severe but plausible adverse developments in financial and economic conditions. This year’s exercise envisions a re-intensification or prolongation of geopolitical tensions and assesses how European insurers would cope with the wide-ranging economic and financial market consequences of such an event.

Objective

While EIOPA’s 2024 stress test is not a pass or fail exercise, it has a mostly microprudential orientation. The goal is primarily to assess the resilience of the participants to the adverse scenario whose shocks go beyond the regular resilience required under Solvency II and provide supervisors with information on whether these insurers are able to withstand severe shocks. EIOPA will also analyze aggregate results to assess potential sector-wide vulnerabilities. This microprudential approach will enable European and national supervisors to issue recommendations to the industry as a whole, and, where relevant, to discuss potential follow-up actions with individual insurers, to improve their resilience.

The microprudential assessment is complemented by the estimation of potential spillover from the insurance sector to other parts of the financial system, triggered by reactions to the prescribed shocks.

Scenario

The 2024 scenario, developed by EIOPA in close cooperation with the European Systemic Risk Board, presumes a renewed build-up or continuation of geopolitical tensions together with a broad range of knock-on effects. As a result of high tensions, the narrative envisages a resurgence of widespread supply-chain disruptions, leading to sluggish growth and reigniting inflationary pressures.

The ripple effects include a re-evaluation of interest rate expectations marked by a surge in short-term market rates and more muted increases in longer term yields, further steepening an already inverted yield curve. The resulting tightening of financing conditions, coupled with subdued growth, is poised to dampen corporate profitability, widen credit spreads, and adversely affect asset classes across the board. The high level of government bond yields, also driven by sustained high risk-free rates, would tighten financing conditions for public spending. The pandemic-induced elevated level of government debt and the need for mitigating measures to support the real economy in a downturn would fuel concerns about sovereign debt sustainability, leading to a further heterogenous increase in government bond rates.

Approach and scope

EIOPA has translated the above narrative into a set of market and insurance-specific shocks to assess the insurance industry’s resilience to them from a capital as well as from a liquidity perspective. The sample for the stress test will include 48 undertakings from 20 member states and cover over 75% of the EEA market in terms of total assets.

Timeline

Following the launch, participating undertakings will have until mid-August 2024 to calculate their results based on the prescribed scenario and submit them to the relevant national supervisor. Once the results are submitted, EIOPA will undertake a quality assurance process to validate the results, which is expected to last until end of October 2024.

Communication of the results

The outcome of the 2024 Stress Test will be published in December in two forms:

• Report based on aggregated data;
• Publication of individual results relating to a subset of capital-based indicators (subject to the consent of the relevant entity).

For more information, go to the dedicated page of the exercise.