COVID-19 proves importance of Solvency II, says EIOPA

According to the European Insurance and Occupational Pensions Authority (EIOPA), over the last few months the COVID-19 outbreak has further proved the importance of the Solvency II regulatory framework.

The EIOPA argues that the framework has helped re/insurers to better align capital to risk, build-up resilience and enhance risk management practices, while the adjustments included for long-term guarantees enabled them to partially mitigate market volatility caused by COVID-19.

The re/insurance sector had a comfortable capital buffer at year-end 2019 which helped it to withstand the initial market shocks caused by the pandemic.

However, the Authority noted that uncertainty about the magnitude of economic disruption will increase downside risks going forward and exacerbate the pre-existing challenges posed by the prolonged yield environment.

Moreover, the shock has also increased credit risk, challenging the asset side valuations of insurers and their solvency positions.

There is also a significant concern that the forthcoming recession will negatively affect corporate sector profitability, resulting in rating downgrades, increased defaults and unemployment.

Some insurers run…