Occupational pension funds and insurers are “well-positioned” to absorb potential economic shocks, according to the latest analysis from the European Insurance and Occupational Pensions Authority (EIOPA).

Its December 2024 Financial Stability Report, which assesses the risks and vulnerabilities facing European insurers and occupational pension funds, found they face a challenging risk landscape marked by high uncertainties.

“Insurers and occupational pension funds, along with the rest of the world, are navigating a complex and highly uncertain geopolitical situation. Although the impact of global tensions on Europe's financial sectors has been limited so far, underlying risks seem to be building up. As a result, the financial system is vulnerable to unforeseen events that could trigger abrupt and far-reaching changes in macroeconomic conditions,” EIOPA stated.

“Inflation has declined and is now hovering near the European Central Bank’s target of 2 per cent. Interest rates have broadly decreased as well after central banks embarked on a series of rate cuts. That said, concerns are mounting regarding the European economy’s growth prospects.”

However, EIOPA believes that both insurers and occupational pension funds are “well-positioned to absorb potential shocks”. In terms of pension funding ratios, defined benefit schemes have slightly increased their funding ratio from 119.8 per cent at the beginning of the year to 120.6 per cent in the second quarter.

In addition, European insurers’ aggregate solvency capital requirements (SCR) ratio is well above the 100 per cent threshold. Life undertakings had a median SCR ratio of 239.2 per cent in Q2 2024 while the same figure for non-life undertakings stood at 212.6 per cent.

In addition to providing an overview of recent developments, the report also features topical analyses on real estate. The report dives into the risks insurers and occupational pension funds face from a languishing real estate sector. EIOPA highlighted how the shift to remote work in the wake of the Covid-19 pandemic and the sharp rise in inflation and interest rates, has resulted in affordability issues and lower demand.

“Real estate valuations suffered as a result. Although both insurers and occupational pension funds invest about 10 per cent of their assets in real estate, EIOPA’s analysis has shown that even a strong real estate shock would only have a modest impact on the sectors, with some individual exceptions,” it stated.

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