ESRB publishes report on systemic risks in the EU insurance sector

The European Systemic Risk Board (ESRB) today publishes a report on the systemic risks arising from the activities of European insurers and re-insurers. The report contributes to the ongoing debate on the systemic relevance of this sector.

Insurance fulfils an important role in the economy by taking on risks and mobilising savings. It contributes to economic growth and financial stability if it functions well.

The ESRB has identified four main ways in which insurers and re-insurers can be the source of systemic risks and amplify these.

  • Insurers can amplify shocks owing to their involvement in so-called non-traditional and non-insurance activities such as, for example, speculative derivative transactions.
  • Certain asset allocation behaviour such as sales of assets in downturns may have a pro-cyclical impact, thus aggravating already falling prices.
  • Life insurers in parts of Europe could create disruption by failing collectively under a scenario with prolonged low risk-free rates and suddenly falling asset prices (“the double hit”). Insurance guarantee schemes and recovery and resolution arrangements, currently in place at national level, are unlikely to be fit to handle such a scenario. From a shorter-term perspective, this is in fact the most imminent risk under the current economic conditions.
  • Underpricing by an insurer, if left unnoticed in microprudential supervision, could lead to a lack of substitutes in those classes of insurance that are vital to economic activity.

To address systemic risks stemming from the insurance and re-insurance sector, competent authorities may make use of a variety of tools, some of which are available under the Solvency II framework. The report recommends further analysing their effectiveness and the potential need for specific macroprudential tools.

Finally, the report underscores the role of insurance in the economy as well as the financial links insurers have with other parts of the economy.

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