EIOPA flags financial stability risks related to private credit, a weakening dollar and global interconnectedness

The European Insurance and Occupational Pensions Authority (EIOPA) published today its December 2025 Financial Stability Report in which it analyses the risks and vulnerabilities facing European insurers and occupational pension funds in a period marked by economic fragility, subdued growth and high uncertainties about the future of international collaboration and its implications on the economy. The report also features five deep dives into current and relevant developments, covering insurers' and occupational pension funds' exposures to private credit, risks stemming from a weakening dollar, global market interconnectedness, cyber risk as a potential systemic threat, and the role of AI in amplifying existing systemic vulnerabilities.

The macroeconomic context throughout 2025 has been influenced by the prospect of a retreat from international cooperation, ongoing uncertainties around trade and geopolitical tensions as well as concerns over elevated debt levels. Inflation is hovering around the 2% target and monetary policy has stabilized, yet high borrowing costs continue to put pressure on public finances. While financial markets have remained resilient, valuations appear optimistic about the impact of tariffs on the economy and about the extent to which the AI boom will boost productivity.

Despite the fragile economic environment, insurers and occupational pension funds have stayed resilient and well-capitalised. Median Solvency Capital Requirements (SCR) for life insurers stand at 235%, at 214% for non-life insurers and at 218% for composite insurers. IORPs' aggregate funding ratio has improved and is now above 120%. However, adverse developments in the current environment could trigger a repricing of risk premia, underscoring the need for continued monitoring and prudent risk management.

Beyond these developments, EIOPA's Financial Stability Report also analyses five focus areas with relevance to insurers, occupational pension funds and supervisors:

• Private credit investments: This topical focus examines European insurers' and IORPs' exposure to private credit and the vulnerabilities associated with such investments. Private credit markets have grown substantially in recent years. While early allocations were driven by a search for yield in a low-interest-rate environment, investment has continued to expand even after risk-free rates began to rise. Private assets typically offer an illiquidity premium and portfolio diversification benefits, making them particularly attractive to long-term investors such as life insurers and pension funds. According to EIOPA's analysis, insurers' private credit exposure totalled €514 billion (or 5.1% of total assets) at the end of 2024, while exposure for IORPs stood at €128 billion (or 4.4% of total assets). Mortgages and loans accounted for around two-thirds of private credit exposures, followed by unlisted or untraded corporate bonds and collateralised securities subject to credit risk. Exposures show considerable cross-country variation, alongside sectoral and geographical concentrations that can offset diversification gains and amplify losses in a downturn. Private credit is also characterised by higher credit and liquidity risk, valuation uncertainty and hidden leverage, which, if not properly managed, can significantly affect exposed undertakings. Continued monitoring of private credit exposures - including concentration metrics - remains essential to mitigating the build-up of potential systemic risks.
  
• Dollar depreciation: The second focus tracks the notable decline in the value of the US dollar throughout 2025 and examines European insurers' and occupational pension funds' exposure to dollar-denominated assets, along with the related risks and mitigating factors. EIOPA's analysis indicates that European insurers and IORPs collectively held around €1.8 trillion in US dollar assets at the end of last year. While the exposures are sizeable, it is important to note that insurers and occupational pension funds share market risk with policyholders and beneficiaries in the case of unit-linked and defined contribution portfolios. To manage currency risk on their investments, IORPs typically use derivatives to hedge FX risk, while also benefitting from implicit hedging when the US dollar and US equity markets move in opposite directions. On the other hand, insurers face a more complex set of challenges, as a weakening dollar can affect not only their investments but also their liabilities and profitability. To mitigate these risks, insurers rely on hedging strategies, currency-specific asset-liability matching, reinsurance, and risk-sharing with policyholders. Overall, the findings underline the importance of continued monitoring of hedging practices and FX risk management.
  
• Interconnectedness with global markets: The third article provides an overview of the exposure of European insurers to non-EEA countries in terms of assets, liabilities and underwriting to gauge the significance of these exposures from a financial stability perspective. While international exposures can offer diversification benefits and improved returns, they can also increase market, currency and counterparty risks as well as underwriting vulnerabilities. The data shows that EEA insurers allocate approximately 13% (€1.24 trillion) of their direct investments to non-EEA issued instruments. Almost half of these exposures (46%) are linked to the United States, followed by the United Kingdom, which receives 22% of direct non-EEA investments. Looking at ceded business, nearly 28% of the risks are transferred outside the EEA, with the UK taking 42.1% of these transfers, followed by Bermuda (26.5%) and Switzerland (22.1%) - all major markets in the global reinsurance industry. These linkages warrant close monitoring given rising geoeconomic tensions and structural shifts in the life insurance business like asset-intensive reinsurance and the transfer of risks to a limited number of jurisdictions.
  
• Cyber risks: The fourth topical focus explores how cyber risks, once viewed primarily as IT issues, have evolved into a macrofinancial stability concern. In today's highly interconnected digital economy, cyber risk has become a persistent structural threat. Technological interdependencies that cut across sectors and borders create vulnerabilities to both malicious and accidental incidents, with the potential to generate large economic and insured losses-even from a single event. These vulnerabilities underscore the need for closer cooperation, improved data collection and more advanced modelling of accumulation risks.
  
• AI's impact on the insurance industry: This fifth and final article examines the growing use of artificial intelligence in the insurance sector and its potential implications for financial stability. While most current applications remain operational, future use cases in underwriting, investment and risk management could amplify existing systemic vulnerabilities. Key channels include correlated behaviour driven by the use of similar models, herding in investment strategies, greater third-party dependencies, demutualisation pressures arising from increasingly granular risk segmentation, and risks linked to the development of insurance markets covering AI-related failures themselves.
  

Read the Financial Stability Report