European stress test scenario has limited impact on Dutch insurers

Fifth EU-wide stress test for insurers

The 2021 EIOPA stress test is the fifth EU-wide exercise for insurers conducted by EIOPA with the aim of assessing the resilience of the insurance sector and identifying vulnerabilities. Forty-four European insurers participated in the exercise, including Aegon, Nationale Nederlanden and Achmea. At national level ASR and Athora also took part in the stress test; their results are not included in the EIOPA figures.

COVID-19 scenario

The exercise examined the sensitivity of the insurance sector to a prolonged
COVID-19 scenario in a “lower for longer” interest rate environment. Under this scenario, there was a significant decline in swap rates, divergence in government interest rates, widening credit spreads and sharp drops in the equity, real estate and commodity markets. The EIOPA stress test also included insurance specific shocks.

Dutch insurers resilient to stress test scenario

The results of the capital component before and after the stress test scenario show that the average asset-to-liability ratio of the Dutch participating insurers is over 100% in both cases, see Figure 1. This reflects the resilience of the industry in the face of such circumstances; insurers hold sufficient assets to cover liabilities to policyholders.

It also shows that this scenario has a more limited impact on Dutch insurers compared to the European average. This is mainly due to the extent to which Dutch insurance groups have hedged their interest rate risk, leading to a higher value of the net interest rate derivatives position.

In addition, the long-term guarantee (LTG) measures and transitional measures (TM) have a significant shock-absorbing effect for both Dutch and European insurers.

Figure 1 - Assets-to-liability ratios for the five Dutch insurers compared to the 44 participants in the EIOPA stress test at the baseline and after application of the stress scenario, both before and after the impact of the LTG and transitional measures

Stress test scenario improves liquidity position of Dutch insurers

The results of the exercise show that the liquidity position of Dutch insurers improves under the stress test scenario (see Figure 2). The average EU sustainability ratio drops below 100% under this stress test scenario, showing the deterioration of the liquidity position of insurers under these circumstances. However, the ratio remains well above 0%, which means insurers have sufficient liquid assets to cover stressed cash flows in the first quarter of 2021. 

Figure 2 - The sustainability indicator for liquidity of Dutch insurers
(Net cash flows corrected for purchase and sale of assets + liquid assets) / (liquid assets)

The results for Dutch insurers are mainly driven by an increase in their cash position from income generated on interest rate swaps. However, assets of Dutch insurers are generally less liquid than those of the European sector, mainly due to larger exposures in mortgage loan portfolios.

Implications

The results show that Dutch insurers are resilient to this stress test scenario. At the same time, the impact of the scenario is strongly mitigated by the LTG measures, in particular the Volatility Adjustment (VA). In its advice to the European Commission on the review of Solvency II, EIOPA included proposals to prevent these overshooting effects through the VA.

An important consideration is that the EIOPA exercise does not take into account vulnerabilities resulting from the low interest rate environment in the medium term. It is therefore still important that insurers take into account the low interest rate environment, and the sustainability of their capital position in the medium term in their capital and dividend policy. It is also important to bear in mind that a scenario involving rising swap rates will negatively impact the liquidity position.

More information

• Press release DNB: EIOPA publishes results of stress test for European insurers
• Press release EIOPA: EIOPA insurance stress test shows industry resilience but also reliance on transitional measures