The European Insurance and Occupational Pensions Authority, known as Eiopa, on Monday published its Insurance Risk Dashboard for the first half of 2023. This assessment showed macroeconomic exposures as the most significant concerns at this time.
Despite a few fluctuations, the risk levels in the industry remain broadly constant, the report said. All risk categories are indicating medium risks, barring macro risks. Macro-related risks continue to be highly relevant to the insurance sector. The report showcases an enhanced forecasted global GDP growth, which further rose to 0.74%, while the CPI forecasts slightly dropped to 3.22% for the upcoming four quarters.
Credit risks currently occupy the middle ground, evidenced by the rise in credit default swap (CDS) spreads for financial secured bonds in Q2 of 2023. Simultaneously, a slight decrease is seen in other fixed income market segments. As equity market volatility diminished, market risks have stepped down from high to medium level.
Solvency capital ratios declined
Liquidity and funding risks highlighted a duality. There has been an increase in cash holdings, yet the liquid assets ratio has seen a decline in Q1 2023. Profitability and solvency risks indicate a decrease in investment returns for life insurers in 2022 compared to 2021. This reduction is primarily driven by substantial unrealized losses incurred due to the rise in interest rates. Both insurance groups and life insurers reported a slight downtick in the median Solvency Capital Requirement (SCR) ratio in the first quarter of 2023.
Insurance risks showed a downward trend in the first quarter of 2023, with the median year-on-year premium growth for non-life insurance reverting to the end of 2021 levels. Interlinkages and imbalances risks persist at a medium level.
Market perceptions indicate positive returns for insurance stocks in Q2 of 2023. However, life insurance stocks underperformed compared to the broader market. This relative underperformance is a trend worth monitoring in subsequent quarters.
Environmental, social, and governance (ESG) related risks are on the rise, with median exposure towards climate-relevant assets inching up to 3.3% of total assets in Q1 2023. Additionally, the catastrophe loss ratio showed further deterioration. The proportion of insurers’ investments in green bonds vis-à-vis total green bonds outstanding remained stable compared to the previous quarter.
Cyber risks increase
Digitalization and cyber risks present a concerning upward trajectory. In the first half of 2023, supervisors identified an increase in the materiality of these risks for insurers. The frequency of cyber incidents impacting all sectors, as measured by publicly available data, has risen compared to the previous year. However, on a positive note, the indicator on cyber negative sentiment showed a decrease in Q2 2023.
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