Solvency II tests find some insurers struggling

European insurance industry
body the Comité Européen des Assurances (CEA) has hailed the
outcome of a stress test conducted by the European Insurance and
Occupational Pensions Authority (EIOPA) as a confirmation of the
industry’s financial robustness.

The test to ascertain the
ability of insurers to comply with Solvency II minimum capital
requirements (MCR) under various adverse economic and investment
market scenarios was undertaken by 58 insurance groups and 71
insurance companies representing some 60% of the overall European
insurance market.

Under Solvency II, the MCR
represents the minimum level – below which the amount of an
insurer’s financial resources should not fall. It is defined as the
potential amount of own funds that would be consumed by unexpected
events whose probability of occurrence within a one-year time frame
is 15%.

But despite the CEA’s
positive view on the outcome of the stress test it can hardly be
said that it provided the industry with a 100% clean bill of
health. EIOPA reported that 13 (10%) of the groups and companies
failed to meet the MCR under the adverse scenario.

EIOPA said that across all
participants in the test, based on data at the end of 2010, the
aggregate solvency surplus was €425bn ($640bn) before the adverse
test scenario was applied.

When the adverse scenario was
applied the aggregate surplus decreased by €150bn (35%). The
insurance groups and companies who did not meet the MCR threshold
showed a solvency deficit of €4.4bn.

According to EIOPA the
adverse scenario assumed:

• a 125 basis point fall in
  yields on fixed interest instruments with maturities of less than
  three months;
• a 62.5 basis point fall in
  yields on fixed interest instruments with maturities of more than
  three months;
• a 15% decline in the equity
  market;
• a 25% decline in commercial
  property values;
• an 11.5% decline in
  residential property values; and
• a sharp widening of yield
  spreads between sovereign bond yields and investment grade and high
  yield bonds.

Under the inflationary
scenario results were somewhat better with 8% of stress test
participants failing to meet MCR threshold.

Overall, under the
inflationary scenario participants’ aggregate solvency surplus
declined by €58bn (13.6%) to €367bn. Aggregate capital of
participants that failed the test fell by €2.5bn.

The inflationary scenario
assumed a 125 basis point rise in yields on fixed interest
instruments with maturities of less than three months and a 62.5
basis point rise in yields on fixed interest instruments with
maturities of more than three months. Equity, commercial property
and residential property values were assumed to remain unchanged.
No change in interest rate spreads was also assumed.

In a supplementary test of
the impact of a shock in the sovereign bond market, EIOPA reported
that 6% of the participating groups and companies would not meet
the MCR.

The aggregate surplus of all
participants under the test decreases by €33bn (7.8%) to
€392bn.

The shock test assumed
different increases in sovereign bond yields across 31 European
countries. These ranged from no increase in German and Swiss bond
yields to a 258 basis point increase in the yield on Irish
bonds.

Rates on UK bonds were
assumed to increase by 28.5 basis points, on French bonds by 48
basis points, on Italian bonds by 136.5 basis points and on Spanish
bonds by 165 basis points.

EIOPA is an independent advisory body to the European
Parliament and the Council of the European Union.

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