The majority of insurance companies in the European Economic Area are well capitalized according to the current regulation (Solvency I), as by the end of 2011 they were on average capitalized at 200% of required levels. However, their capitalization and profitability are facing now a slightly decreasing trend, reveales the biannual report on the financial stability published on June 11, by EIOPA. This conclusion is based on the analysis of 20 largest European insurance groups.

The Report highlights that the insurance sector remains vulnerable to a possible long- lasting low interest rate environment, though the sector would be capable to cope with this challenge for some time. But this situation might look different in case of renewed turmoil, a failure of governments to stabilize their fiscal situations or a disruptive unwinding of currency risk. While the first order effects of such events seem to be limited and are likely to hit only local insurers, the second order effects might hit bigger European insurers.

EIOPA Members and Observers have been asked to assess risks and challenges according to the probability of a materialisation and the impact on the national insurance markets. Based on the responses from 29 Member States, sovereign risk, equity risk, low interest rates as well as credit risk of banks are the risks with highest overall rankings. Especially the first of these items is considered to have an increased probability of materialisation and also the impact of such a scenario is expected to be significant.

Despite a number of severe catastrophic events, the European reinsurance market remained relatively stable and solidly capitalized by the end of 2011. In the beginning of 2012 a modest increase in rates has been observed, which can be partly explained by the absence of major loss events in Europe and North America.

In the IORPs sector a trend towards defined contribution schemes continues. At the same time there is a grave evolution in the funding positions of IORPs, especially for such countries where defined benefit schemes are already very widespread. In those countries, most notably the UK and the Netherlands, recovery programmes are run by the respective regulators.

With regard to macroeconomic developments, the Financial Stability Report concludes that the political and economic climate continues to weigh on growth prospects in Europe. Uncertainty over the euro area government debt level and political situation in some EU countries continues to influence markets even after the recently made strong policy responses.