Geopolitical shocks have a significant impact on the solvency of Dutch and European insurers

A total of 48 European insurers participated in EIOPA's stress test, including Dutch insurers Achmea, ASR, Athora NL and Nationale Nederlanden. This is the sixth time that EIOPA performed an EU-wide stress test for insurers. The aim is to assess the resilience of individual insurers and the sector as a whole in the event of a severe shock. The test is meant to provide insight, insurers cannot pass or fail it.

Scenario with rising geopolitical tensions

The EIOPA scenario assumes rising geopolitical tensions, accompanied by more frequent disruptions in global supply chains. This leads to lower economic growth and higher inflation, which are in turn followed by higher wage demands and rising market interest rates. Simultaneously, government bond yields go up, credit spreads widen sharply and equity and property prices fall significantly. In addition, underwriting shocks occur, such as massive surrender of insurance policies. It is the combination of these different shocks that makes this a severe scenario.

Significant impact on solvency

To assess insurers' resilience to this scenario, EIOPA compares their financial position at the end of 2023 with the financial position after applying this stress scenario. Among other things, EIOPA looks at the ratio of assets to liabilities, which shows whether an insurer has sufficient assets to cover its liabilities. Therefore, this ratio should at least be higher than 100%.

The results in Figure 1 show that the ratio of insurers who participated in the test is higher than 100% both before (left-hand bar) and after (middle bar) application of the stress. At the same time, the chart shows that the impact on insurers' own funds is significant. The decline in the ratio of Dutch insurers is in line with the European average: 4 percentage points for both. The right-hand bar shows the outcome after insurers implement recovery measures to improve their financial position after stress. Examples of such measures include reducing costs, suspending dividend payments and taking out reinsurance.

Figure 1: Assets/liability ratio for Dutch and European insurers in the baseline, after applying the stress scenario and after implementing recovery measures. The assets and liabilities of participating insurers are aggregated.

The results of the stress test also show how different elements of the scenario impact the insurers’ balance sheets. A major part of the impact is caused by the increase in credit spreads, causing bond values to drop sharply. Also, as Dutch insurers have a relatively large allocation to mortgage loans, the heavy shock on mortgage spreads has a major impact on the solvency level. Furthermore, the quality of insurers’ own funds is reduced due to the shock. Because of the tiering restrictions, insurers are  not allowed to fully include lower-quality assets in the required capital.

On the other hand, insurers are not negatively impacted by rising interest rates in the scenario. This means that insurers' policies to hedge the risks of fluctuating interests are effective in this scenario. This was also the case in the 2021 stress test, when interest rates were dropping.

Limited impact on liquidity

The total liquid assets of Dutch insurers are sufficient to absorb the liquidity shock. In the stress scenario, especially the massive surrender of life insurance policies and the high margin calls on derivatives have a significant impact on liquid assets. Both create large cash outflows. Although this has a negative impact on the amount of cash insurers need to meet their payment obligations, Dutch insurers have sufficient liquid assets they can sell in the short term if needed.

Valuable insights

The results of the stress test do not affect the insurers’ required regulatory capital buffer. However, the stress test does provide valuable insights into potential vulnerabilities for insurers as well as for supervisory purposes.