EIOPA’s financial stability report sees insurers and pension funds weathering a complex and uncertain risk landscape

Real estate vulnerabilities: The first topical focus dives into the risks insurers and occupational pension funds face from a languishing real estate sector. Both residential and commercial real estate prices have been negatively affected by recent developments. These include the shift to remote work in the wake of the Covid-19 pandemic, dealing a blow to office occupancy rates, and the sharp rise in inflation and interest rates, which resulted in affordability issues and lower demand. Real estate valuations suffered as a result. Although both insurers and occupational pension funds invest about 10% of their assets in real estate, EIOPA’s analysis has shown that even a strong real estate shock would only have a modest impact on the sectors, with some individual exceptions.
Asset intensive (or funded) reinsurance: The second topic focuses on funded reinsurance, whose use and popularity has increased in recent years. Asset intensive reinsurance involves the transfer of both the investment and underwriting risks from the cedant to the reinsurer. This arrangement allows cedants to run a leaner balance sheet, which typically results in higher solvency ratios. At the same time, such deals also introduce additional credit, legal and operational risks. While the financial stability concerns related to asset intensive reinsurance appear limited for now, the concentration of this business among a few reinsurers – often with alternative business models and in specific offshore jurisdictions – warrants continued supervisory scrutiny.
European Systemic Risk Assessment Framework (SRAF): The third and final topical focus of the report describes the methodological and organizational aspects of SRAF and presents the main sources of systemic risk identified in 2024 for Europe’s insurance sector based on 2023 year-end Solvency II data and macroeconomic and financial market data up to end-July 2024. These include increasing risks related to interlinkages between different financial actors due to a rise in the sale of credit default swaps and in the overall derivatives positions of insurers as well as emerging risks such as climate, digitalization and cyber risks that continue to be material across the European Economic Area.