The European Insurance and Occupational Authority (EIOPA) has identified key risks for the pension and insurance sector, highlighting the low-interest-rate environment as a key risk for pensions.

Although the Covid-19 pandemic continues to be an overarching risk for both sectors, EIOPA, in its 2021 Financial Stability Report, said that despite recent pick-up in long-term yields, markets still operate in a low-interest rate environment, which puts pressure in particular on life insurers and pension funds.

In a foreword to the report, EIOPA chairperson, Petra Hielkema, said: “The recent pick up in long-term yields, the low-interest-rate environment remains the main narrative, putting pressure, in particular, on life insurers and pension funds. Moreover, inflation remains elevated with a negative impact on the profitability of non-life business lines exposed to unexpectedly inflated claims. Looking ahead, further economic developments will be the crucial factor for the risk assessment of the European insurance and pension sector.”

In regard to inflation, EIOPA noted that most forecasts expect inflationary pressures to be transitory and foresee inflation moderating in the course of 2022. The report stated, however, that inflation were to persist, it could prove to be a significant source of risk for non-life insurance, negatively affecting their profitability through the potential coverage of claims in real terms.

“Macroeconomic developments in the months to come will therefore be a crucial factor for the risk assessment of the European insurance and pension sectors,” the report noted.

In addition, the report found that environmental risk is top in terms of the highest expected increase in materiality for the insurance and pension sectors due to the increasing nature and intensity of extreme weather events.

Therefore, EIOPA said supervisors need to ensure that robust risk management practices, especially at reinsurers, are in place to address underwriting risks. The insurance industry, however, could also experience increased demand for new services and play a crucial role in closing existing protection gaps.

Furthermore, cyber risk is one of the most important risks for the European insurance sector, reflecting widespread digitalisation trends and home office solutions. Despite the increasing momentum, the understanding of cyber risks remains limited, pointing to necessary improvements in data collection and cyber risk modelling. As with environmental risks, the cybersphere could also open up opportunities for insurers seeing that demand for cyber insurance is bound to rise.

The still ongoing pandemic shed light on some areas of concern for financial stability and provided regulators, supervisors and market participants with valuable lessons learned. EIOPA nevertheless believes that data from the crisis must be handled with caution. Bearing in mind that unprecedented fiscal measures amid accommodative monetary policies may have distorted regular risk assessment frameworks, it is important for risk managers and supervisors not to underestimate risks.

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