A weak macroeconomic environment is creating severe challenges for certain insurance and pension fund business models, according to a report by the European Insurance and Occupational Pensions Authority (EIOPA).
It outlined a number of factors including quantitative easing (QE), low interest rates and limited growth in premiums, which meant supervisors would have to monitor the situation closely.
Gabriel Bernardino, chairman of EIOPA, said: "Today's macroeconomic reality is creating severe challenges for certain insurance and pension fund business models. In this environment it is fundamental that supervisors monitor the situation very closely and challenge the industry on the sustainability of their business models."
EIOPA's latest financial stability report said in the long run QE might create "favourable" conditions to insurers and pension funds by stimulating economic growth.
But in the short-term QE further lowered risk-free rates and this created "an enormous challenge for the profitability of insurance companies, especially for life insurance companies".
Bernardino said it would be "extremely difficult" for insurers and pension funds to maintain their profitability without taking more risks.
EIOPA said in the insurance sector, returns and profitability of products remained "under strong pressure" and growth in insurance premiums remained limited. This was due to low yields and market competition to offer the best rates to appeal to policyholders.
In the reinsurance sector, the report said risks arising from the low yield environment might lead the reinsurance industry to consolidate, while reinsurance premiums had been pressurised because firms continued to face competition from non-traditional sources of capital.
For occupational pension funds, EIOPA said defined benefit pension schemes were negatively affected by declining interest rates and in defined contribution schemes members might face significantly lower pension benefits.
Bernardino said: "Furthermore, action is needed from the industry to deal with the vulnerabilities of the in-force business and to restructure their mix of products. The transitional measures included in Solvency II should be used to ensure a smooth transition to the new regime, avoiding disruptions in the market, while ensuring that firms will take the necessary steps to restructure their businesses".
