10% fall short of capital requirements under Solvency II stress test

The warning comes as Eiopa announced the results of its second European insurance stress test, which it said confirmed the robustness of the European insurance market overall.

Between March and May, Eiopa tested insurers' ability to meet the future Solvency II minimum capital requirements, the ultimate regulatory threshold, under a series of stress scenarios. The stress scenarios comprised market, credit and insurance-related risks.

Simultaneously, Eiopa performed a supplementary test to evaluate sovereign bond exposures.

Eiopa emphasises that the stress test is based on hypothetical and severe stress scenarios and is not a forecast of what is likely to happen.

While the market is generally "well prepared" for potential future shocks, 13 - approximately 10% - of the participating groups and companies do not meet the MCR under the adverse scenario. It added that 10 of the groups - 8% - failed to meet the MCR in the inflation scenario.

Based on data as of 31 December 2010, the European insurers that participated in the stress test showed an aggregate solvency surplus of €425bn before the stress test scenarios are applied. The aggregate surplus decreases to €275bn (minus €150bn) when the adverse scenario is applied and to €367bn (minus €58bn) in the inflation scenario.

The insurance groups and companies that did not meet the MCR threshold show a solvency deficit of €4.4bn if the adverse scenario were to occur and €2.5bn of the inflation scenario were to materialise. At the aggregate level, Eiopa identifies the main drivers of the results as being adverse developments in equity prices, interest rates and sovereign debt markets.

It added: "On the liability side, non-life risks are more critical, triggered by increased claims inflation and natural disasters."

Sovereign bond exposure was covered separately in a supplementary test. The results of the shock on sovereign bond yields show that six - approximately 5% - of the participating groups and companies would not meet the MCR. The aggregate surplus of €425bn decreases to €392bn (minus €33bn) in this particular scenario.

While the exercise was completed by 221 insurance and reinsurance groups and companies, headquartered in the European Union, Iceland, Liechtenstein, Norway and Switzerland, the results reported are for 58 groups and 71 companies due to aggregation of the results of companies within groups. This represents approximately 60% of the overall European insurance market and is above Eiopa's aim to include at least 50% of the insurance market of each country as measured by gross premium income.

Eiopa emphasised the importance of considering that the stress test is based on a future regulatory system and is not necessarily indicative of any current solvency problems.

"It rather highlights an exposure to the hypothetical risks and must be understood in the light of the current status of Solvency II during the development of the fifth Quantitative Impact Study," it said. "Over the coming months, the National Supervisory Authorities will discuss the results of the stress test with individual insurers.