The European reinsurance sector has been exposed to significant uncertainty during the COVID-19 pandemic, which has led to a threefold decline in the capital positions of reinsurers, gross written premium (GWP) for life reinsurance, and underwriting profitability in non-life business.
According to the Financial Stability Report published by the European Insurance and Occupational Pensions Authority (EIOPA), the lingering strains and uncertainty from the pandemic have exposed the reinsurance industry in particular, especially coupled with heightened catastrophic activity.
However, this meant a strengthened property catastrophe bond market and alternative reinsurance market owing to their diverse nature for catastrophe-exposed business and relatively high returns, with total outstanding insurance-linked securities reaching $46 billion at year-end 2020.
Moreover, the report determined that the European insurance sector ended with a 7 per cent year-on-year decline in GWP in the life business, while noting an 8 per cent increase in the non-life business.
Underwriting profitability fluctuated between the two lines of business, with EIOPA identifying an increase for workers’ compensation and transport, at the expense of a decrease in property damage and general liability insurance.
In other areas, solvency ratios for non-life business remained stable with a year-on-year uptick from 212 per cent to 218 per cent, although the report noted a decline in the life business in H1 2020 that “recovered slightly” by year end.
The report identified climate risk to be a focal point as environmental, social and corporate governance (ESG) factors become increasingly influential in the investment decision-making of insurers and pension funds, particularly concerning underwriting.
It identified equity investments in the European insurance sector as being particularly sensitive to climate-change related transition risks, such as extreme weather events. Insurance products can be utilised as risk-transfer mechanisms to mitigate financial losses related to climate risks, although green bonds have the potential to carry reputational risk for insurers if not carried out fully.
Cyber attacks were also identified as a significant risk, particularly during the pandemic’s remote work model. The report noted the financial sector, such as payment firms, insurers and credit unions, have been most affected by this.
The International Monetary Fund has estimated that the number of cyber attacks has tripled over the last decade. Citing the figure, the report predicts that the insurance industry can expect an increase in the materiality of risks related to digitalisation.
Peter Braumüller, executive vice chairperson of the EIOPA, comments: “While the EU economy is still subject to high risks, the end of the crisis will allow time to analyse the lessons learned. Some have already been reflected in the Solvency II review, where EIOPA’s approach focused on improving the existing regulation based on the experience during the first years of application and taking into account the changes in the current economic context.”
“The COVID crisis highlighted that we are better prepared due to the Solvency II regulatory framework. However, we need to continue strengthening our methodological approaches to also capture new emerging risks,” he concludes.
