The European insurance sector’s risks remain stable at medium levels, with some vulnerabilities linked to market volatility and fluctuating real estate prices, according to EIOPA’s Insurance Risk Dashboard. Beinsure has selected the key insights from the report.
The Insurance Risk Dashboard, based on Solvency II data, summarises the main risks and vulnerabilities in the European Union’s insurance sector through a set of risk indicators. The data is based on financial stability and prudential reporting collected from insurance groups and solo insurance undertakings.
Market risks stay high, driven by persistent volatility and challenges in the euro area real estate market. Real estate prices continue to decline, though the rate of decline has slowed compared to earlier quarters. Other risk categories are holding at medium levels.
Key Insights from the Insurance Risk Dashboard
- Macroeconomic risks remain stable at a medium level. GDP growth forecasts are holding steady, while inflation forecasts have eased slightly. Fiscal balances have improved compared to the previous quarter.
- Credit risks are also stable at a medium level. Insurers maintained broadly unchanged median exposures to government and corporate bonds.
- Credit default swap (CDS) spreads stayed stable, with the exception of financial unsecured corporate bonds, which experienced narrower spreads.
- Bond market volatility has decreased but still sits at elevated levels. The market turmoil in August was short-lived, as equity volatility quickly returned to previous levels.
- Property prices continued to decline, though the pace of the decline has slowed.
- Liquidity and funding risks remain at a medium level, with improved funding conditions in the catastrophe bond market.
- Profitability and solvency risks are stable at a medium level. While solvency ratios for insurance groups and life solo undertakings showed slight deterioration in Q2 2024, non-life undertakings maintained stable solvency.
- Interlinkages and imbalances risks are stable, with all related indicators, including exposures to the financial sector, domestic sovereigns, and derivatives, remaining unchanged in Q2 2024.
- Insurance risks are holding steady at a medium level. Premium growth for life and non-life business has been positive, although non-life loss ratios have seen a slight increase.
- Market perceptions remain at a medium level but show signs of an upward trend. Life and non-life insurance stocks have outperformed the market. While the median price-to-earnings ratio stayed steady, there has been upward movement in the upper tail of the distribution.
- ESG-related risks are stable at a medium level, but the risk outlook for the next 12 months indicates a potential increase. Climate transition and physical risk indicators remain broadly unchanged. The median ESG rating score for insurers stayed stable.
- Green bond exposure as a percentage of total corporate bonds has remained steady in Q2 2024 but shows a gradual increase over time.
- Flood and windstorm risk exposures have remained stable, with higher exposure to windstorm risk.
- Digitalisation and cyber risks remain at a medium level. The outlook for the next 12 months suggests an increase.
The reference date for company data is Q2-2024 for quarterly metrics and 2023 year-end for annual figures. Most market indicators are based on data up to the end of 2024. Risk levels reflect the reference date, with trends shown for the three months prior.
The outlook covers the subsequent 12 months, derived from assessments by 23 national competent authorities (NCAs) and categorized by the anticipated change in risk materiality: substantial decrease, decrease, unchanged, increase, or substantial increase.
EIOPA’s Insurance Risk Dashboard
Macro Risks
Macroeconomic risks remain stable at a medium level. GDP growth projections across major geographical regions hold at around 1.3% for the next four quarters, while global inflation forecasts have slightly eased, averaging 2.1%, down from 2.2% in the previous quarter.
Average monetary policy rates across major currencies declined marginally, and the contraction of major central banks’ balance sheets slowed slightly compared to previous periods.
The weighted average of 10-year swap rates for key currencies also dropped slightly relative to the prior quarter. Fiscal balances for major economies improved, narrowing from -4.4% to -3.7% in Q1 2024, while the credit-to-GDP gap remained steady at approximately -18.2%. Unemployment rates are also stable based on the most recent data from Q2 2024.
GDP consensus forecasts
Average of forecasts four quarters ahead, weighted average for Euro area, United Kingdom, Switzerland, United States, BRICS.
Insurance Risks
Insurance risks remain stable at a medium level. Year-on-year premium growth for life and non-life business remained positive in Q2 2024 (with a median growth of 6% and 9%, respectively).
The distribution of the loss ratio moved upwards, with the median at 64% in Q2 2024.
Non-life insurance premium growth
Life insurance premium growth
Year-on-year change in gross written premiums. Distribution of indicator (interquartile range, median).
Insurance Market Perceptions
Market perceptions remain at a medium level but with an increasing trend. Life and non-life insurance stocks outperformed the market at the end of September.
While the median price-to-earnings ratio for insurance groups held steady in the same period, the upper tail of the distribution moved upwards.
The distribution of insurers’ CDS spreads remained largely unchanged from the previous quarter, while there were two positive changes in external rating outlooks for insurance groups in the sample.
Market Risks
Market risks remain elevated. Although bond market volatility eased at the end of September, it continues high by historical standards. The market turmoil experienced in August was brief, with equity volatility quickly returning to levels seen in previous quarters.
In 2024, insurers maintained a median allocation of 51% in bonds and 6% in equities, keeping their investment strategies consistent.
Real estate values continued to decline, albeit at a slower pace than in the previous quarter. Insurers’ exposure to property remained modest, with a median of 3.2% of total assets.
Investment in property
The Herfindahl-Hirschman Index, which measures asset concentration, showed a slight increase during this period. Data revealed that life insurers experienced a positive spread between investment returns and guaranteed interest rates, attributed to favorable market conditions.
Credit Risks
Credit risks remain steady at a medium level. In Q3 2024, credit default swap (CDS) spreads for government, financial secured, and non-financial corporate bonds held steady, while spreads for financial unsecured corporate bonds narrowed.
Insurers’ median exposures to financial unsecured, government bonds, and non-financial bonds increased slightly, while their exposure to financial secured bonds remained largely unchanged compared to the previous quarter.
As of Q2 2024, insurers’ investment allocations as a percentage of total assets were:
- 25% in government bonds
- 9.7% in unsecured financial bonds (up from 9.1%)
- 1.4% in secured financial bonds
- 10.3% in non-financial bonds (up from 9.8%)
Investment in government bonds
The fundamental credit risk indicator for the non-financial corporate sector remained stable, based on Q1 2024 data. Insurers’ exposure to mortgages and loans remained low, with a median of 0.3% of total assets. However, the 75th percentile increased from 2.5% to 3.4% in Q2 2024.
Meanwhile, the household debt-to-income ratio in the Euro area declined by 2 percentage points, to 86%, based on Q1 2024 data. Overall, the credit quality of insurers’ investments remains high, with the median credit quality step (CQS) around 2, equivalent to an AA rating from S&P. The median share of low-rated investments (CQS > 3) was 1.2% in Q2 2024.
Digitalisation & Cyber Risks
Digitalization and cyber risks remain at a medium level, with an increasing risk outlook for the next 12 months. The materiality of these risks for the insurance sector, as assessed by supervisors, slightly decreased in Q3 2024, driven by a reduction in the perceived probability of risk materialization.
Cyber negative sentiment slightly increased, reflecting growing concerns among insurers during the same quarter.
The number of global cyber-attacks affecting all sectors, as measured by publicly available data, declined in Q4 2023 compared to the previous quarter.
Scores compiled based on the assessment of probability and impact (lhs: scale from 1 to 4) of digitalisation & cyber risks from National Competent Authorities. The country average for each answer is then normalised (rhs: scale 0-100).
Number of publicly disclosed global cyber attacks over time and changes.
ESG Related Risks
The median ESG rating score for insurers remained stable in 2023, with Environmental ratings showing improvement, while Social and Governance ratings remained unchanged. ESG-related risks are steady at a medium level, but the risk outlook for the next year suggests a potential increase.
Insurers’ median exposure to green bonds as a percentage of total corporate bonds stayed at 6.4%, the same as the previous quarter. Likewise, the median exposure to climate-relevant assets remained at 3.6% of total assets.
Climate physical risk indicators showed no change in 2024, with exposure to flood and windstorm risks stable, but a significantly higher exposure to windstorm risk.
Liquidity & Funding
Liquidity and funding risks remain stable at a medium level. In Q2 2024, insurers’ median cash holdings remained steady at around 0.7% of total assets, and the median liquid asset ratio was unchanged from the previous quarter, standing at 45% of total assets. Insurers’ lapse rates rose in 2023, with the median rate reaching approximately 5% (4% in 2022).
Despite a rise in policy lapses, insurers maintained a positive cash flow, as indicated by the net cash flows to liquid assets ratio.
In Q2 2024, the catastrophe bond market saw improved funding conditions, with issuance volumes increasing and the spread-to-expected annual loss ratio decreasing. In Q3 2024, insurers issued approximately $5.5 mn in bonds, with an average coupon-to-maturity ratio of 0.3.
Cat Bond Issuance
Profitability & Solvency
Solvency and profitability risks remain stable at a medium level, though solvency ratios for both insurance groups and life undertakings deteriorated slightly in Q2 2024. The median solvency ratio for insurance groups declined from 214% in Q1 2024 to 200% in Q2 2024.
The median solvency ratio decreased modestly, while the ratio for non-life undertakings remained stable (down 7 percentage points to 231% for life, and up 3 percentage points to 212% for non-life).
The median non-life combined ratio held steady at 97%. According to the latest available semi-annual data, profitability measures such as the return on assets, return to premiums, and return on excess of Asset over Liabilities remain broadly unchanged compared to the previous assessment with regards to the median values.
Combined ratio – non-life insurance
Interlinkages & Imbalances
Interlinkages and imbalances risks remained stable at a medium level, with insurers’ median exposure to banks increasing by 2 percentage points to 16% of total assets, while exposures to other insurers (1.2%) and financial activities other than banking and insurance (23%) largely remained unchanged compared to the previous quarter.
Insurers’ median exposure to domestic sovereign debt and derivatives also held steady at around 8% and 0.3% of total assets, respectively.
The share of premiums ceded to reinsurers was broadly stable, with the median at 4.4% in Q2 2024, down from 4.8% in the previous quarter.
Investments in Insurance Sector
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Methodology
Macro Risks covers trends in the broader economic environment that might influence the insurance industry. It relies on publicly accessible data on macroeconomic variables relevant for comprehensive monitoring and analysis.
Credit Risks reviews the insurance sector’s susceptibility to credit risks. It evaluates asset class exposures linked to credit and incorporates specific risk metrics relevant to these asset classes to provide a complete picture.
Market & Asset Return Risks outlines key financial market risks impacting insurers, along with the potential for gains or losses from investments and associated costs like administration and investments. The analysis examines investment exposures and risk indicators, typically using yield volatility from indices to show the current risk landscape.
Liquidity & Funding Risks evaluates how exposed the European insurance sector is to liquidity disruptions. It includes indicators like the lapse rate in life insurance, which can hint at risk if high, the level of cash holdings as a liquidity buffer, and data on catastrophe bond issuance. Reduced issuance volumes or higher spreads signal potential concerns.
Profitability & Solvency examines the financial stability and profitability of the European insurance sector, using data at both the group and solo levels. It measures solvency through ratios and the quality of own funds, with profitability assessed using metrics like the combined ratio for non-life insurers and investment returns for life insurers.
Interlinkages & Imbalances addresses connections within the insurance sector and with other financial sectors, such as banks. It includes analysis of links between primary insurers and reinsurers and exposure through derivative holdings. It also considers sovereign debt exposure and the impact of these connections.
Insurance (Underwriting) Risks include gross written premiums for life and non-life insurance. Both rapid growth and significant drops signal potential concerns: the former raises questions about long-term stability, while the latter may indicate a shrinking market.
Market Perceptions reviews how financial markets view the European insurance sector’s health and profitability. It analyzes the performance of insurance stocks compared to the broader market, evaluates price/earnings ratios, monitors CDS spreads, and considers external ratings and outlooks.
Environmental, Social, and Governance (ESG) Related Risks evaluates the sector’s exposure to ESG risks and considers factors that might emerge. Indicators include ESG ratings, the proportion of green bonds in portfolios, and exposure to climate-related events. It also covers economic damage from extreme weather and tracks natural catastrophe losses.
Digitalization & Cyber Risks identifies risks linked to increased digitalization. It addresses operational threats like cyber-attacks and underwriting risks related to cyber insurance. Indicators include assessments from regulators on digital and cyber risks, trends in cyber incidents, and sentiment among European insurers about these threats. This area will expand as more data becomes available.
FAQ
The Insurance Risk Dashboard highlights that the European insurance sector’s risks are mostly stable at medium levels. Key concerns remain market volatility and challenges in the real estate sector, even as some risk indicators show slight improvements.
Macroeconomic risks are stable at a medium level. GDP growth projections are steady, global inflation forecasts have eased slightly, and fiscal balances have improved. Unemployment rates and major financial indicators remain consistent.
Credit risks also remain at a medium level. Insurers’ exposures to government and corporate bonds are broadly stable, with minimal changes in credit default swap (CDS) spreads, except for financial unsecured corporate bonds, which experienced some narrowing.
Market risks are still high, primarily due to persistent bond market volatility and a challenging real estate market. Property prices continue to decline but at a slower pace. Despite brief turmoil in August, equity volatility has returned to more familiar levels.
Liquidity and funding risks remain stable at a medium level. Catastrophe bond funding conditions have improved, while other liquidity indicators are unchanged. Insurers’ cash holdings and liquid asset ratios have stayed steady.
Profitability and solvency risks remain at medium levels. Solvency ratios for insurance groups showed slight deterioration, though non-life undertakings remained stable. Investment returns for life insurance improved, and profitability metrics like the return on assets are holding steady.
Digitalization and cyber risks remain at a medium level, but the outlook for the next year indicates a potential increase. Supervisors report a slight decrease in the probability of these risks materializing, although there is growing negative sentiment around cyber threats.
