ESRB Says Fiscal Crisis Poses Challenge to Insurance Companies

The European Systemic Risk Board said insurance companies and occupational pension funds aren’t immune to consequences of the euro-area debt crisis on financial markets.

“Their growing exposure to the interplay between sovereign and bank risks is becoming a challenge, at least in terms of risk concentration,” the ESRB said in its annual report published in Frankfurt today. “The current low interest rate environment may also cause difficulties for those insurance companies and occupational pension funds that are contractually obliged to offer a minimum return rate to policyholders and prospective pensioners. If the current interest-rate conditions deteriorate or remain in place for several years, fragilities in the industry may come to light.”

The European Central Bank has cut interest rates to a record low of 1 percent and flooded financial markets with more than 1 trillion euros ($1.2 trillion) in cheap three-year loans to head off a credit crunch, encourage lending to companies and households and spur demand for unsecured bank debt.

As banks repay maturing debt and low-interest ECB funds, “long-term investors are currently exposed to reinvestment risk, in conditions where yields are generally low and volatility high,” the ESRB said. “To what extent and how quickly insurers change their investment patterns will influence whether or not financial market conditions will stabilize and have an impact on the overall credit supply.”


The ESRB was “ confronted with an exceptionally challenging economic and financial environment,” Chairman Mario Draghi said in the foreword of the report. “To address the range of systemic risks that this entailed, it had to become operational very quickly.”

The ESRB last year issued three public recommendations, which focused on the macroprudential mandate of national authorities, lending in foreign currencies, and U.S. dollar-denominated funding of credit institutions. It said today it is “developing a framework for monitoring the implementation of its recommendations.”

“It has already taken initial steps in this process, with the establishment of a follow-up mechanism and the creation of a dedicated space on its website, and further steps will follow,” the ESRB said.

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