Only 10% of European insurers would fail an adverse stress situation under the Solvency II capital requirement rules, according to the European Insurance and Occupational Pensions Authority (EIOPA).

The adverse stress situation covers a severe deterioration in markets combined with negative macroeconomic variables.

EIOPA tested 221 insurer and reinsurer capital bases against a baseline scenario, which included severe stress on the organisation’s reserves, as well as an inflation model and the adverse test.

A total of 11 insurers and reinsurers failed the baseline model test by an average of €2.6 billion ($3.4 billion) while the 13 companies failing the adverse test needed an additional €4.4 billion ($5.8 billion).

Ten insurers failed the inflation scenario test and they needed an additional €2.5 billion ($3.3 billion) to meet the Solvency II standard.

According to EIOPA, European insurers had a solvency surplus of €425 billion ($566 billion) before the test was applied.

This decreased to €275 billion ($366 billion) when the adverse test was applied and €367 billion ($489 billion) after the inflation scenario was run.

EIOPA identified the main drivers of the results as being adverse developments in equity prices, interest rates and sovereign debt markets.

On the liability side, general insurance risks are more critical, triggered by increased claims inflation and natural disasters.  

The results of the stress test indicated the European insurance industry is well prepared for potential future shocks as tested in this exercise, EIOPA says. 

National insurance industry supervisors will now discuss the results with individual insurers to help them develop their individual plans for implementing Solvency II.