06/01/2022 | EIOPA
In its fifth Union-wide stress test exercise, conducted in cooperation with the European Systemic Risk Board (ESRB), EIOPA tested the resilience of the European insurance industry against a prolonged COVID-19 scenario in a “lower for longer” interest rate environment. The exercise covers a representative sample of 44 participants from 20 countries, representing 75% of the EEA market1. The scenario identified a set of market and insurance specific shocks specifically constructed to reflect the current EIOPA and ESRB assessment of prevailing systemic risks to the financial system. These risks stem from the worsening of economic prospects, reflected in a global decline in longterm risk-free interest rates from already historically low levels, accompanied by a material repricing of the risk premia amid weakening countries’ fiscal positions and challenging corporate profitability. An additional price correction in commercial and residential real estate completes the set of market shocks2. The diverging movements of the risk-free interest rate and of the risk premia qualifies the market scenario as a double-hit, potentially generating detrimental effects both on the liability side through the reduction of the discounting curves and on the asset side through the reduction of the prices of the relevant asset classes held by insurers in their investment portfolios.