Coordinated supervisory response needed to long-lasting low interest rates: European authority

The persistent low interest rate environment poses real challenges to insurers and requires a coordinated supervisory response in terms of the assessment of future solvency and systemic stability problems, as well as the design and timing of market-wide measures, notes the European Insurance and Occupational Pensions Authority (EIOPA).

The challenges posed by a persistent low interest rate environment are felt particularly by those insurers offering guaranteed rates of return to policyholders, EIOPA suggests in its Opinion on Supervisory Response to a Prolonged Low Interest Rate Environment, published Monday.

The authority recommends that national supervisory authorities (NSAs) actively engage in promoting private sector solutions to address the impact of low interest rates.

“A fine balance has to be achieved in ensuring that consumers are treated in a fair and equitable manner, while also addressing the impact of a prolonged period of low interest rates on insurers,” says a statement from the authority, an independent advisory body to the European Commission, the European Parliament and the Council of the European Union.

“The economic environment shows us that joint actions against long-lasting low interest rates environment are crucial,” EIOPA chairman Gabriel Bernardino notes in the statement. “By coordinating these actions, EIOPA is committed to ensure a consistent supervisory approach and a fair and equitable treatment to policyholders. Private sector solutions are fundamental, but they cannot take advantage of the information asymmetry and must be designed in a way that does not mislead policyholders,” Bernardino adds.

EIOPA notes that on the liabilities side, persistent low interest rates can lead to an increase in insurers’ obligations in today’s terms and, consequently, to a deterioration of their financial position; on the assets side, they have an adverse impact on investment results and increase the reinvestment risk of assets.

“In the case of short-term insurance business, lower returns reduce the financial margin available to offset adverse combined ratios,” the statement notes. “Furthermore, low interest rates may encourage other business model changes, such as alterations in asset allocations in a ‘search for yield,’ which may create new risks on the asset side of the balance sheet.”

EIOPA suggests that NSAs should engage with insurers to explore private sector measure to address the impact of persistent low interest rates, as well as assess the potential scope and scale of the risks arising in this environment, paying special attention to those insurers identified as facing greater exposure.

For its part, EIOPA will coordinate an exercise to quantify the scale and scope of the risk arising from a prolonged low interest rate environment.