The European Insurance and Occupational Pensions Authority (EIOPA) has launched a EU-wide stress test for the European insurance sector, the first since the implementation of Solvency II.
The exercise is designed to assess the resilience of the sector to severe adverse market developments, and examine the potential increase of systemic risks in situations of stress.
The test focuses on two major market risks: the prolonged low-yield environment and the 'double-hit' scenario where a sudden drop in asset prices is combined with a low risk free rate.
The exercise focuses on long-term business performed by solo undertakings (no insurance groups). In order to include a higher number of small and medium-sized insurers, EIOPA increased the participation target from a 50% in 2014 to a 75% share of each national market.
Gabriel Bernardino, chairman of EIOPA, said: "The current challenging macroeconomic environment has to be acknowledged in such a stress test exercise. Therefore, EIOPA decided to conduct severe stress scenarios.
"I am confident that the results of the simulation of such shocks will provide us with a high-resolution picture of the European insurance sector and its most critical vulnerabilities."
To limit the burden on the industry, EIOPA will make use of this exercise to collect information on the Solvency II equity and long-term guarantee measures at the same time. This is part of a mandatory review and is not connected with the stress test.
EIOPA added the test should not be viewed as a 'pass-or-fail' exercise, and there would not be requirements for calculating solvency position after the test.
"We need to see the issues requiring particular supervisory attention and response to the potential build-up of systemic risks at the European level," Bernardino said.
"Hence this exercise will not focus on who is not meeting the capital requirements after the shocks but on the financial stability implications of those scenarios".
EIOPA will publish weekly questions and answers addressing possible queries from participating companies.
The deadline for submission is 15 July. Results will be disclosed in December this year.