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The Actuary The magazine of the Institute & Faculty of Actuaries

Sovereign risk tops concerns for European insurance and pensions sectors

Sovereign risk is currently the main threat to the financial stability of the European insurance and occupational pension sectors, according to a report from the European Insurance and Occupational Pensions Authority (EIOPA).

The report covers developments in the insurance, reinsurance and occupational pension fund markets as of April 2011 and is released ahead of discussions on the macro-financial conditions and overall stability of the EU financial system.

Apart from sovereign risk, the authority says that risks have not changed significantly from the 2010 year-end report but generally remain at high levels.

The financial positions of both sectors have, however, improved slightly during the period under review, and have therefore built-up additional loss-absorbing capacity.

Insurance sector - main points

>> In 2010, the European insurance business largely recovered from the financial market crisis.

>> Premiums have started to increase and profits tend to be higher, albeit at a still modest level.

>> Insurance undertakings’ solvency margins have again built up shock absorption capacity for future stress events.

>> EIOPA believes that the sector is well suited to cope with possible longer-lasting low interest rate environment.

>> Despite a year of significant natural catastrophes in 2010, the reinsurance industry was able to restore its balance sheets and accumulate capital.

Pensions sector - main points

>> The recovery in the financial markets in the last two years has had a significant positive effect on the funding positions of Institutions for Occupational Retirement Provision (IORPs)

>> The current low interest rate environment creates differing problems in the defined benefit (DB) and defined contribution (DC) sector.

>> The funding ratios of the DB occupational pension fund sector are improving, but remain below the levels observed in 2007.

>> The financial turmoil directly affected the portfolio of DC members, with the greatest impact being on those close to retirement and/or heavily invested in equities. However, almost all DC systems are relatively young, so the number of older workers affected is small in absolute as well as in relative terms.

The full report can be found here.