Covid chaos ate into EU insurers’ own funds

Eligible own funds for meeting capital requirements fell €155 billion ($183.7 billion) across European Union insurers over the first three months of the year, as the coronavirus-induced market panic walloped their asset portfolios.

The aggregate ratio of EU firms’ own funds to their solvency capital requirement (SCR) was 232% as of Q1, down from 246% the prior quarter, and is at its lowest level since at least Q3 2016, when public disclosure began.

The median ratio was 205% across all insurers, 216% for life insurers and 204% for non-life insurers.

 

Aggregate eligible own funds across firms totalled €1.56 trillion as of Q1, down 9% quarter-on-quarter. The aggregate SCR dropped just 2% over the period, to €694.1 billion.

What is it?

Eiopa collects and publishes insurance statistics based on Solvency II quantitative reporting templates (QRTs). They contain aggregated country-level information about the balance sheets, asset exposures, own funds, capital requirements, premiums and claims and expenses of insurers covered by the Solvency II framework.

The balance sheet data used in the above graphs was extracted from S.06.02 QRTs from 2,049 firms.

Why it matters

Under the Solvency II regulatory framework, own funds constitute an insurers’ loss-absorbing capital. Because of the losses sustained to equity, fund, and credit portfolios over March and April, when the coronavirus pandemic rocked markets around the world, some of this capital was used up, which explains the quarter-on-quarter drop.

Though the aggregate and median ratio of own funds to SCR remains healthy, those in the bottom 10% of the distribution are dancing on the edge of the 100% minimum threshold. Certain non-life insurers look especially vulnerable, as those at the tenth percentile of the distribution had a Solvency II ratio of just 133% in Q1, meaning some at the very far end of the distribution are likely barely in compliance with regulatory minimums.

The recent market rebound may have helped these firms bolster their solvency positions. But their local regulators are sure to be keeping a close eye on their performance going forward.

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