• The stress test focuses on long-term business and targets 75% of each national market.
  • EIOPA has provided a template for submitting results, reducing the work for insurers. Where possible, the templates would be identical to the Day 1 templates or the annual reporting templates.
  • The test also includes information on the impact of Long-term Guarantee (LTG) measures.

Key insights

On 24 May 2016 European Insurance and Occupational Pensions Authority (EIOPA) launched the EU-wide insurance stress test for 2016, results of which must be submitted by 15 July 2016.  The stress test focuses on long-term business performed by solo undertakings (no insurance groups) and targets 75% of each national market in terms of gross life technical provisions. The stress test presents two scenarios:

  • “Low for long” - focusing on a prolonged low interest rate environment
  • “Double hit” - which combines a low interest rate curve with market stress

EIOPA has provided a template for submitting the results and additionally there is a set of questions regarding insurers’ likely dynamic response to the scenarios.  The Solvency Capital Requirement (SCR) only has to be provided for the base scenario, as calculated for Day 1 reporting, which reduces the work for insurers in completing the exercise. 

Worth mentioning, EIOPA has emphasised that this is not a pass/fail test, it has been designed to provide insight into the financial stability of insurers under severe stress scenarios and simplify their tasks when summiting the stress test.

Where possible, the templates would be identical to the Day 1 reporting templates or the annual reporting templates. This will make the completion easier for firms but one of the challenges in completing this exercise will be the qualitative questions completion since they will require decisions on management actions under the stress scenarios.

In addition to the stress tests the submission includes information on the impact of the Long-term Guarantee (‘LTG’) measures.  The collection of this information is to meet the requirement in the Solvency II Directive (Article 77(f)) for EIOPA to report to the European Parliament, Council and Commission annually about the impact of the measures.  There are two key areas of information:

  • LTG measures and transitional measures impact on the balance sheet
  • The sensitivity of technical provisions and own funds to the assumptions underlying the extrapolation of the risk-free interest rate term structure.

Impact of LTG and transitional measures

The information which must be reported, on the baseline scenario, is a step-by-step approach on the impact of the LTG and transitional measures on the balance sheet (including solvency capital requirement).  This includes:

  • Results with no transitional on technical provisions
  • Impact of transitional on TPs
  • Results with no transitional on interest rate
  • Impact of transitional on interest rate
  • Results with no volatility adjustment and no transitional measures
  • Impact of setting the volatility adjustment to zero
  • Results with no matching adjustment, no volatility adjustment and no transitional measures
  • Impact of setting the matching adjustment to zero
  • Impact of all LTG  and transitional measures
  • Impact of the symmetric adjustment to the equity risk sub-module set to zero
  • Impact of the duration based equity risk sub-module

For the double hit and low-yield scenario the total impact of the LTG and transitional measures must be reported, although the SCR does not have to be reported under these scenarios.  There is a potential error in the reporting template in that the SCR is currently required for these scenarios on the LTG reporting tab. However the specification clearly states that the SCR does not have to be recalculated under the stress scenarios.

Sensitivity of technical provisions and own funds to the assumptions underlying the extrapolation of the risk-free interest rate term structure

The sensitivity of technical provisions and own funds to the assumptions underlying the extrapolation of the risk-free interest rate term structure must be calculated (as per Article 44 (2a) of the Solvency II Directive).  The sensitivities are not prescribed, it is up to firms to decide on them and how many to perform.  The template gives space for 10 sensitivities and the guidance states that if more than 10 sensitivities are performed then the firm should report the 10 they consider most relevant.  If less than 10 are performed then firms should report them all and leave the other spaces blank.