EIOPA’s 2024 Stress Test: EU Insurers Show Resilience, but Geopolitical Risks Could Still Break the Bank

The European Insurance and Occupational Pensions Authority (EIOPA) has just released its much-anticipated 2024 Stress Test, and it’s good news—sort of. European insurers are shown to be resilient enough to handle significant geopolitical disruptions, but the cost could be steep. It’s a mixed bag of reassuring strength and a reality check for the industry.

EIOPA’s test puts insurers in the hot seat with a particularly harsh geopolitical scenario—one that could feel all too real in today’s world. The scenario envisioned a dramatic rise in geopolitical tensions, creating a domino effect of supply chain disruptions, low economic growth, and rising inflation. If that wasn’t enough, insurers also had to contend with tighter financing, a steep yield curve inversion, and heightened concerns about government debt.

For insurance-specific challenges, the test included higher-than-usual claims, mass policy lapses, and a sharp drop in premium income. It’s the kind of crisis scenario that’s unlikely to happen in one fell swoop but feels increasingly plausible in the current global climate.

48 insurers from 20 countries participated in the test, covering around 75% of the European insurance market. The test looked at two approaches: a fixed balance sheet (FBS) scenario, where insurers could only rely on their existing management strategies, and a constrained balance sheet (CBS) scenario, where they were allowed to take more flexible, reactive measures like selling assets or raising capital to recover from the shocks.

The aim was to see how well insurers could survive such a volatile scenario, not just from a capital perspective, but from a broader financial resilience point of view. The added flexibility in the CBS approach also gave EIOPA a chance to measure how insurers’ actions might impact the wider financial system.

Capital Resilience: A Rough Ride, but Survivable

The results show that while the shocks from the stress test were significant, European insurers started with a healthy cushion. The average solvency ratio (the capital insurers hold to meet obligations) before the test stood at 221.8%. But after the scenario played out, that ratio dropped by nearly 100 percentage points, falling to 123.3%. That’s a loss of more than €270 billion, which would clearly strain any organization.

Here’s where it gets more optimistic: insurers were able to bounce back once they were allowed to take reactive management actions. With those adjustments, solvency ratios rose to 139.9%. This demonstrates the industry's ability to adapt to market chaos by selling assets, retaining dividends, and raising capital where necessary. Even better, all participating companies maintained an asset-to-liability ratio above 100%, meaning they could meet their obligations to policyholders without sinking.

The Hidden Risk

While the capital situation showed resilience, the test’s liquidity findings are a bit of a wake-up call. The stress scenario prompted significant outflows, with insurers facing higher-than-expected claims and policy surrenders, while premium payments took a hit. The result? A net technical outflow of €314 billion, which insurers couldn’t fully cover with their existing cash reserves.

To fill the gap, insurers had to liquidate part of their assets, turning from net buyers to net sellers of €305.6 billion. That’s a stark reminder that having liquid assets on hand is critical—especially when the unexpected happens.

EIOPA Chair Petra Hielkema highlighted the significance of this year’s test, given the rising global uncertainty. “It’s reassuring to see that European insurers are well-positioned to deal with the consequences of a geopolitical escalation,” she noted. “However, the amount of capital and liquidity insurers would need to cope with these shocks is substantial.”

Despite the overall positive outcomes, Hielkema expressed concern that many insurers chose not to disclose their individual results, limiting the transparency of the test.

What’s Next for European Insurers?

While the stress test results are generally positive, they do underline the challenges insurers could face if geopolitical tensions keep rising. The insights from this test will guide European regulators and national supervisors in their efforts to better manage these risks going forward. Expect potential changes to the way insurance companies are monitored and the types of capital and liquidity buffers they must maintain.

For now, insurers are showing that they can withstand a major geopolitical storm. But how long can that resilience last if the global landscape continues to shift in unpredictable ways?