RISK DASHBOARD - EIOPA Home risk still represent important concerns for the EU insurance industry. This is also reflected by the slightly deteriorating market perception and the recent

RISK DASHBOARD

April 20171

Risks Level Trend

1. Macro risks High

2. Credit risks Medium

3. Market risks Medium

4. Liquidity and funding risks Medium

5. Profitability and solvency Medium

6. Interlinkages and imbalances Medium

7. Insurance (underwriting) risks Low

Market perceptions Level Trend

8. Market perceptions Medium

Key observations:

- According to this assessment, risks for the insurance sector remained overall

stable in Q4 and some improvements were observed. Solvency II ratios are stronger due in part to higher market values of assets and the increase of the risk free curve used for discounting the technical provisions. Volatility has

decreased and inflation rates have slowly started to converge to desired target levels.

- Despite these positive signs, the continuing low-yield environment and the

observation that market fundamentals might not properly reflect the underlying credit risk still represent important concerns for the EU insurance industry. This

is also reflected by the slightly deteriorating market perception and the recent underperformance of insurance stock prices.

1 Reference date for company data is Q4-2016, while the cut-off date for most other indicators is end-March 2017.

2

Macro risks

Level: high

Trend: constant

The macroeconomic environment characterised by an enduring low-yield

environment remains fragile, especially for the insurance sector. Some sign of improvements are noted as inflation rates have further converged to desired target levels and unemployment rates are decreasing, but some dispersion among

European countries can be observed.

The GDP forecast remains around 2% expected real growth.

Unemployment rate decreases over the last few years, while some dispersion among European countries continues to exist.

Source: Bloomberg Finance L.P. Source: Bloomberg Finance L.P.

The fiscal deficit is slightly widening in the last months. The inflation consensus forecast is further approaching desired target levels around 2%.

Source: Bloomberg Finance L.P. Source: Bloomberg Finance L.P.

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%

GDP consensus forecast (weighted average euro area, US, UK, CH,

Emerging Markets)

4.0%

5.0%

6.0%

7.0%

8.0%

9.0%

10.0%

Unemployment rate (weighted average EU, US, CH, China)

-6.0%

-5.0%

-4.0%

-3.0%

-2.0%

-1.0%

0.0%

Fiscal deficit(weighted average EU, US)

0.0%

0.4%

0.8%

1.2%

1.6%

2.0%

CPI consensus forecast (weighted average euro area, US, UK, CH,

Emerging Markets)

3

After a prolonged period of interest rate decreases, the swap rates rebounded since mid-2016.

The Credit-to-GDP gap is still largely negative.

Source: Bloomberg Finance L.P. Source: BIS

Policy rates increased following monetary policy changes in the US. Central Banks’ balance sheet further expanding due to QE interventions.

Source: Bloomberg Finance L.P.

Credit risks

Level: medium

Trend: constant

Indicators covering the exposure towards corporate bonds were enhanced by

increasing the granularity of the indicators. The enhanced approach confirms the medium risk level previously obtained.

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

10Y swap rates (weighted average EUR, GBP, USD, CHF)

-14.0%

-12.0%

-10.0%

-8.0%

-6.0%

-4.0%

-2.0%

0.0%

Credit to GDP gap (weighted average euro area, US)

0.0%

0.1%

0.1%

0.2%

0.2%

0.3%

0.3%

-10.0%

-5.0%

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

Monetary policy (weighted average for euro area, UK, US, CH)

Change in Balance Sheet (lhs)

Policy Rate (rhs)

4

Spreads for sovereign bonds decreased slightly in autumn 2016 and remained stable afterwards. The share of investments in sovereign bond dropped slightly.

Spreads for secured financial bonds showed high volatility in 2016 and beginning 2017, moving close to 0%.

Source: Bloomberg Finance L.P., QFG (N=85); QFT prior to 2016


Spreads for corporate bonds non-financials remained stable since mid-2016.

Spreads for unsecured financial bonds decreased slightly after a temporary increase in the previous quarter.



0.0%

0.1%

0.2%

0.3%

0.4%

0.5%

0.6%

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

30.0%

35.0%

40.0%

45.0%

50.0%

Sovereign bond investments

Distribution: median, interquartile range

(lhs, lower)SovX Western Europe Index (rhs, upper)

0.00%

0.05%

0.10%

0.15%

0.20%

0.25%

0.30%

0.35%

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

14.0%

16.0%

18.0%

20.0%

Corporate bond investments –Financials (secured)

Distribution: median, interquartile range (lhs,

lower)

Spread of Covered Bond Index over Swap Rate

(rhs, upper)

0.0%

0.2%

0.4%

0.6%

0.8%

1.0%

1.2%

1.4%

1.6%

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

30.0%

35.0%

40.0%

45.0%

50.0%

Corporate bond investments – Non-Financials


lower)

Spread of 7-10y A Corp. Bond Index of Govt.

Bond Index (rhs, upper)

0.0%

0.2%

0.4%

0.6%

0.8%

1.0%

1.2%

1.4%

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

14.0%

16.0%

18.0%

20.0%

Corporate bond investments –Financials (unsecured)


(lhs, lower)

SNRFIN CDSI GEN 5Y Corp (rhs, upper)

Phasing-In of SII

Data

Phasing-In of SII

Data

Phas

ing-

In of

SII

Data

5

Market risks

Level: medium

Trend: decreasing

The volatility in bond prices has decreased from the third to the fourth quarter,

resulting in a lower risk score. The median value of the duration mismatch between assets and liabilities is about 3 years.

Bond price volatility slightly decreased. Exposures towards bonds are stable over the last quarter.

Since beginning 2016 stock volatility has been decreasing. Exposures are also driven by increasing market values.

Source: Bloomberg Finance L.P., QFG (N=85) Source: Bloomberg Finance L.P., QFG (N=85); QFT prior to 2016

0.0%

10.0%

20.0%

30.0%

40.0%

50.0%

60.0%

70.0%

80.0%

30.0%

35.0%

40.0%

45.0%

50.0%

55.0%

60.0%

65.0%

70.0%

75.0%

Investment in bonds


lower)

Implied Bund Future volatility (rhs, upper)

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

30.0%

35.0%

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

Investment in equity


lower)

VSTOXX (rhs, upper)

6

The indicator is stable due to the use of an annual risk measure and property investments are broadly unchanged.

The level of concentration of assets remains stable.


Herfindal Hirshman index computed on 5 balance sheet asset classes (government bonds, corporate bonds, equities, properties and cash and equivalent) Source: Bloomberg Finance L.P., QFG (N=85)

Liquidity and funding risks

Level: medium

Trend: stable

The overall assessment of risks relating to liquidity and funding remains rather unchanged for Q4 which confirms a stable development for the whole year. Lapse

rate (for liquidity risk) is slightly above 2% and bond issuance (for funding risk) indicator reports a high demand for debt instrument issued by insurers showing a low level of risk.

4.6

4.7

4.8

4.9

5.0

5.1

5.2

5.3

5.4

5.5

5.6

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%

3.5%

4.0%

4.5%

Investment in property


lower)

Rental yields, EU, offices and retail (rhs,

upper)

25.0%

30.0%

35.0%

40.0%

45.0%

50.0%

Concentration of assets


7

The share of cash holdings increased slightly. The proportion of more liquid assets in the portfolios of the insurance undertakings remains on a stable level.

Source: QFG (N=85) Source: QFG (N=84)

Issuance volume has increased and the demand for cat bonds still remains at a high level.

In recent years it has become cheaper for insurance companies to issue longer-term debt.

Volumes in USD mn, spread in percent Source: www.artemis.bm

Source: Bloomberg Finance L.P

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%

Cash holdings


50.0%

55.0%

60.0%

65.0%

70.0%

75.0%

80.0%

Liquid assets ratio


.00

.500

1.00

1.500

2.00

2.500

3.00

3.500

4.00

4.500

5.00

0

500

1,000

1,500

2,000

2,500

3,000

3,500

4,000

4,500

5,000

2013-Q

4

2014-Q

1

2014-Q

2

2014-Q

3

2014-Q

4

2015-Q

1

2015-Q

2

2015-Q

3

2015-Q

4

2016-Q

1

2016-Q

2

2016-Q

3

2016-Q

4

Cat Bond Issuance

Upsize

announced volume (mill USD)

multiplier (spread / expected annual loss)

0.0

0.1

0.2

0.3

0.4

0.5

0.6

0.7

0.8

0.9

1.0

Insurers' bond issuances: Average coupon to maturity

8

Profitability and solvency

Level: medium

Trend: substantial

decrease

The overall improvement of the profitability and solvency risks results especially from the strong improvement observed for Solvency ratios due to the increase of

eligible own funds. The Solvency ratios have improved both in life and in non-life segment. Profitability of the sector remains unchanged.

The net combined ratio is quite stable, averaging 97%. 25% of the market is either below 92% or above 100%.

The growth of the excess of asset over liabilities increased significantly during the last quarter.

Source: QRS (N=928) Source: QFG (N=74)

The average excess of assets over liabilities (used as a proxy of return on equity) is 7.4% and stable compared to the Q2 annualised figure. The lowest

percentiles have improved in the second half of 2016.

The average return on assets is 0.6%. It is slightly improved compared to the Q2 annualised figure, as is the whole distribution.

Source: QFG (N=85) Source: QFG (N=84)

84.0%86.0%88.0%90.0%92.0%94.0%96.0%98.0%

100.0%102.0%104.0%

Combined ratio - non-life (net)


-10.0%

-5.0%

0.0%

5.0%

10.0%

15.0%

Change in excess of assets over liabilities


0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

Return on excess of assets over liabilities


0.0%0.1%0.2%0.3%0.4%0.5%0.6%0.7%0.8%0.9%1.0%

Return on assets


9

The average return to premiums amounts to 4.5%.

The SCR coverage ratio is on average 198%. It has increased by 16 percentage points. For non-life firms it is 259% (+17 p.p.), higher than for the average life company at 208% (+36 p.p.).

Source: QFG (N=84) Source: “Total” QFG (N=84), “Life” QRS (N=455),

“Non-life” QRS (N=1,067)

Own funds have a high weight of Tier 1 (on average around 87%). The time series shows a slight increase.

Source: QFG (N=84)

Interlinkages & imbalances

Level: medium

Trend: constant

The risks observed overall remain at a medium level. The exposure to the financial sector, in particular towards the banking sector, and in domestic sovereign bonds

(median slight above 10%) is captured in the risk level. Insurers’ indebtedness and the reinsurance part of premium remain stable and low.

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

Return to premiums


100.0%120.0%140.0%160.0%180.0%200.0%220.0%240.0%260.0%280.0%300.0%320.0%

2016-Q

1

2016-Q

2

2016-Q

3

2016-Q

4

2016-Q

1

2016-Q

2

2016-Q

3

2016-Q

4

2016-Q

1

2016-Q

2

2016-Q

3

2016-Q

4

Groups Solo - life Solo - non-life

Solvency ratios


70.0%

75.0%

80.0%

85.0%

90.0%

95.0%

Tier 1 own fundsto total own funds


10

Insurers’ derivative holdings median level has seen a slight increase from Q3 to Q4. However the distribution has narrowed from previous quarters. Overall the risk score remains stable.

The insurers’ indebtedness indicator has been replaced by the following indicator which measures the level of non-insurance related liabilities against non-unit linked assets.

Source: QFG (N=85); QFT prior to 2016 Source: QFG (N=85)

Reinsurance part of premium remains at a steady level inducing no change in the sub-risk category.

Source: QFG (N=84); QFT prior to 2016

Insurance (underwriting) risks

Level: low

Trend: constant

The insurance risk indicators saw a diverse movement. Whereas the catastrophe losses increased significantly (based on a small sample), this effect was

overcompensated by a benign development of the general loss ratio. General uncertainties, instabilities and events (e.g. terrorist attacks in Europe, major natural disasters and extreme weather events) remain to be a potential

source of threats to the future development of insurance business. Market analysts expect the insurance marketplace to change more drastically in 2017 than before, also due to the rising threat of cyber-attacks.

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%

Derivative holdings


0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

7.0%

8.0%

9.0%

Insurers "non-insurance" liabilities


0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

14.0%

16.0%

18.0%

Reinsurance part of premium


11

Catastrophe losses significantly increased after coming down in the previous quarter. Cumulated losses in 2016 reached a multi-year high due to devastating earthquakes and powerful storms.

Loss ratios decreased from Q3 to Q4. The median value also decreased, remaining on a low level.

Source: Munich Re Source: QRS (N=1,299)

Market perceptions

Level: medium

Trend: increase

Market perception of the insurance industry has slightly deteriorated mainly driven by the reversed outperformance indicator. Also, ratings and rating outlooks have

deteriorated.

Substantial outperformance of insurance stocks in Q3. Reversed in Q4.

Price/earnings ratios remained stable over the last quarter.

Outperformance over 3-month periods Source: Bloomberg Finance L.P.

Source: Bloomberg Finance L.P. (N=12)

-2.0%

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

Catastrophe loss ratio(Cumulative Year to Date figure)

40.0%

45.0%

50.0%

55.0%

60.0%

65.0%

70.0%

75.0%

80.0%

Loss Ratio (gross)


-10.0%

-5.0%

0.0%

5.0%

10.0%

Outperformance of insurance stock prices

Life insurance Non-life insurance

0.0

2.0

4.0

6.0

8.0

10.0

12.0

14.0

16.0

18.0

20.0

Price/earnings ratio


12

Constant median and slightly increased dispersion across the sample.

Overall rating quality remains good with a decrease in the highest rated category.

Source: Bloomberg Finance L.P. (N=16) Source: Standard & Poor’s via Bloomberg Finance

L.P. (N=32)

Vast majority of outlooks is stable. The number of negative outlooks increased.

Source: Standard & Poor’s via Bloomberg Finance L.P. (N=32)

0.0

10.0

20.0

30.0

40.0

50.0

60.0

70.0

80.0

90.0

100.0

Insurers' CDS spreads


0%

20%

40%

60%

80%

100%

Insurers' external ratings (credit quality steps)

Highest Very High High Good Speculative

-10-8-6-4-202468

10

Insurers' external ratings(positive/negative outlooks)

Positive change Negative change

13

APPENDIX

Level of risk Very high

High

Medium

Low

Trend Large increase

Increase

Constant

Decrease

Large decrease

Description of risk categories

Macro risks

Macro risk is an overarching category affecting the whole economy. EIOPA’s

contribution focuses on factors such as economic growth, state of the monetary

policies, consumer price indices and fiscal balances which directly impact the insurance

industry. The indicators are developed encompassing information on the main

jurisdictions where European insurers are exposed to both in terms of investments and

product portfolios.

Credit risks

The category measures the vulnerability of the European insurance industry to credit

risk. To achieve this aim, credit-relevant asset class exposures of the (re)insurers are

combined with the relevant risk metrics applicable to these asset classes. For instance,

the holdings of government securities are combined with the credit spreads on

European sovereigns.

Market risks

Market risk is, for most asset classes, assessed by analysing both the investment

exposure of the insurance sector and an underlying risk metric. The exposures give a

picture of the vulnerability of the sector to adverse developments; the risk metric,

usually the volatility of the yields of the associated indices, gives a picture of the

current level of riskiness. The risk category is complemented by an indicator which

captures the difference between guaranteed interest rates and investment returns.

Liquidity and funding risks

This category aims at assessing the vulnerability of the European insurance industry to

liquidity shocks. The set of indicators encompasses the lapse rate of the life insurance

sector with high lapse rate signalling a potential risk, holdings of cash & cash

equivalents as a measure of the liquidity buffer available, and the issuance of

catastrophe bonds, where a very low volume of issuance and/or high spreads signals a

reduction in demand which could form a risk.

Profitability and solvency

The category scrutinises the level of solvency and profitability of the European

insurance industry. Both dimensions are analysed for the overall industry (using group

data) and include a breakdown for the life and non-life companies (using solo data). In

14

detail, the solvency level is measured via solvency ratios and quality of own funds.

Standard profitability measures for the whole industry are complemented by indicators

such as the combined ratio and the return on investments specifically applied to the

non-life and life industry respectively.

Interlinkages and imbalances

Under this section various kinds of interlinkages are assessed, both within the

insurance sector, namely between primary insurers and reinsurers, between the

insurance sector and the banking sector, as well as interlinkages created via derivative

holdings. Exposure towards domestic sovereign debt is included as well.

Insurance (underwriting) risks

As indicators for insurance risks gross written premiums of both life and non-life

business are an important input. Both significant expansion and contraction are taken

as indicators of risks in the sector; the former due to concerns over sustainability and

the latter as an indicator of widespread contraction of insurance markets. Information

on claims and insurance losses due to natural catastrophes also contribute to this risk

category.

Market perception

This category encompasses the financial markets’ perception of the healthiness and

profitability of the European insurance sector. For this purpose, relative stock market

performances of European insurance indices against the total market are assessed, as

well as fundamental valuations of insurance stocks (price/earnings ratio), CDS spreads

and external ratings/rating outlooks.

Abbreviations

AFG Annual Financial Stability Reporting for Groups

ARS Annual Prudential Reporting for Solo Entities

QFG Quarterly Financial Stability Reporting for Groups

QRS Quarterly Prudential Reporting for Solo Entities

QFT Quarterly Fast Track Reporting (pre-Solvency II, for around 32 large

insurance groups on a best effort basis)

Notes

- Sample size for the different indicators may vary according to availability and

consistency of the reported information.

- Vertical dashed lines where displayed in the graphs signals the structural change in

the series driven by the transition from Solvency I to Solvency II reporting.

EIOPA Risk Dashboard April 2017

© European Insurance and Occupational Pensions Authority (EIOPA), Frankfurt, 2017. All rights reserved. This report provides an interim risk-update, updating previous Risk Dashboards. Legal basis of this report is Regulation (EU) No 1094/2010 of the European Parliament and of the Council of 24 November 2010 establishing a European Supervisory Authority (European Insurance and Occupational Pensions Authority), and in particular Article 32 (Assessment of market developments) thereof. The charts and analyses found in this report are occasionally based on third party material. EIOPA is not responsible for the accuracy or completeness of such data. Third party material is protected by intellectual property rights such as copyright, tradename or similar rights, and may be subject to other terms and conditions. Therefore, reproduction and further distribution of such material is subject to the permission of that third party.

Documents

RISK DASHBOARD - EIOPA Home risk still represent important concerns for the EU insurance industry. This is also reflected by the slightly deteriorating market perception and the recent