The Bank of England has published a staff working paper that sets out separate risk-based capital frameworks for solvency risk and systemic risk for systemically important European life insurers. The research concludes that systemic risk exposure in the European life insurance sector has increased since 2007, indicating that capital requirements should capture not only firm-level solvency risk but also expected capital shortfalls when the sector is under stress. The paper analyses six large European life insurers. It uses an augmented Merton-Vasicek model to estimate solvency capital through a value-at-risk approach and the SRISK methodology to measure systemic risk as capital shortfall conditional on distress in the wider European life insurance sector. Systemic risk peaks around the 2008-2009 global financial crisis, the 2010-2012 eurozone sovereign debt crisis and the 2020 COVID-related market shock, with UK insurers also showing stress during the 2022 gilt market turmoil. The research also finds evidence of interconnectedness between systemically important banks and insurers, including common variation in systemic risk and volatility spillovers that intensify during periods of financial stress.
Bank of England2026-01-23
Bank of England staff paper finds European life insurers' systemic risk has risen since 2007 and should be reflected in capital requirements
The Bank of England has published a staff working paper on capital frameworks for major European life insurers that separates solvency risk from systemic risk. It finds that sectorwide systemic risk has risen since 2007 and that capital requirements should reflect that exposure. The paper also identifies stronger bank-insurer interconnectedness during periods of financial stress.