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Elia Berdin

25 November 2015
FINANCIAL STABILITY REVIEW - ARTICLE
Financial Stability Review Issue 2, 2015
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Abstract
The current environment of protracted low interest rates poses major challenges to euro area insurance companies. This special feature discusses how a prolonged low-yield period might affect the profitability and the solvency of euro area insurers. In the article, it is argued that if interest rates were to stay low for a long time, this could have material implications for the profitability and the solvency of many insurers. However, it is also shown that the impact of low interest rates is likely to differ markedly across insurance companies depending on their business model and balance sheet structure. In particular, the impact is expected to be highest for small and medium-sized life insurers with large government bond portfolios and high guarantees to policyholders that reside in countries where these guarantees are rigid and where contracts embed a long time to maturity.
JEL Code
G00 : Financial Economics→General→General
27 February 2017
WORKING PAPER SERIES - No. 2028
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Abstract
In this paper, we develop an analytical framework for conducting forward-looking assessments of profitability and solvency of the main euro area insurance sectors. We model the balance sheet of an insurance company encompassing both life and non-life business and we calibrate it using country level data to make it representative of the major euro area insurance markets. Then, we project this representative balance sheet forward under stochastic capital markets, stochastic mortality developments and stochastic claims. The model highlights the potential threats to insurers solvency and profitability stemming from a sustained period of low interest rates particularly in those markets which are largely exposed to reinvestment risks due to the relatively high guarantees and generous profit participation schemes. The model also proves how the resilience of insurers to adverse financial developments heavily depends on the diversification of their business mix. Finally, the model identifies potential negative spillovers between life and non-life business through the redistribution of capital within groups.
JEL Code
G22 : Financial Economics→Financial Institutions and Services→Insurance, Insurance Companies, Actuarial Studies
G23 : Financial Economics→Financial Institutions and Services→Non-bank Financial Institutions, Financial Instruments, Institutional Investors
G20 : Financial Economics→Financial Institutions and Services→General