Double hit scenario ‘cannot be ruled out’, EIOPA says

The European Insurance and Occupational Pensions Authority has said a double hit scenario cannot be ruled out.

A double hit scenario is a situation that combines decreases in asset values with a lower risk free rate, which in the past, EIOPA has said would lead to ‘severe negative implications’.

In its report on financial stability in the (re)insurance and occupational pension fund sectors of the European Economic Area, EIOPA said there is an ongoing “extremely challenging macro-economic and financial environment”.

“Monetary policy and low crude oil prices imply a protracted low yield environment in the short- to medium-term. In this environment, the “double-hit” scenario cannot be ruled out,” the report said.

In addition, the report noted that within the occupational pensions sector in certain countries the funding ratio of the Institutions for Occupational Retirement Provision (IORPs) has dropped due to low interest rates. This trend was also confirmed by the results of EIOPA’s first EU-wide stress test for occupational pensions.

Commenting on the report, EIOPA chairman Gabriel Bernardino said IORPS need to use “robust risk management practices” to manage the ongoing macroeconomic challenges.

“In the IORPs sector, prudential regimes are not sufficiently risk-sensitive and thus might underestimate the risks. Therefore, EIOPA in its recent opinion on the common framework for risk assessment and increased transparency for pension funds recommended actions for improvements,” he added.

EIOPA Financial Stability Report June 2016 is available via EIOPA’s Website.

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