EUROPE – The European Insurance and Occupational Pensions Authority (EIOPA) is to conduct a stress test this year to better assess the solvency risk posed by low interest rates for insurance companies and occupational pension funds.
The Frankfurt-based authority, presenting an opinion paper to national authorities on the impact of prolonged low interest rates, stressed that long-term rates were of "critical" importance to life insurers, since they had long liabilities that became increasingly expensive in current terms when market rates were low.
EIOPA said the financial position of these companies deteriorated under such conditions, particularly where the duration of liabilities exceeded that of assets.
"This problem is even more pronounced where guaranteed rates of return have been offered to policyholders," it said.
The authority went on to say that, in life insurance, guaranteed business is the most exposed to a prolonged period of low interest rates due to potential yield-spread compression.
"In this case, as assets are reinvested, the achievable spread between returns on assets and guaranteed rates shrinks," it said.
"This reinvestment risk is the primary means by which the impact of low interest rates affects the financial position of firms in a historical cost-accounting environment."
The authority called on national regulators to "actively assess" the potential scope and scale of risks arising from low interest rates on insurance companies.
National agencies should then report their findings to EIOPA.
The authority also warned that occupational pensions faced similar risks.
"EIOPA has focused to date on insurers, but the low interest rate environment is also having an impact on occupational pension funds," it said. "[We plan] to explore this more fully during the course of 2013."
The authority declined to specify when the stress test might be conducted.