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Stress tests defeat one in 12 European insurers
Alistair Gray in London
One in 12 European insurance companies does not hold enough capital to comply with a sweeping regulatory shake-up of the industry, according to stress tests carried out by the European Insurance and Occupational Pensions Authority.
The safety buffers of 8 per cent of insurers are inadequate under the forthcoming Solvency II regime, due to come into force in little more than a year, the regulator said, which would not name any of the companies.
The EIOPA, whose stress tests were based on balance sheets as of the end of 2013, said that overall the sector was “generally sufficiently capitalised in Solvency II terms”.
Yet the results of the study, carried out over the past seven months, are the latest sign that some insurance companies are grappling with persistently low interest rates, which are hurting returns from their fixed-income dominated investment portfolios.
Life and pension groups are under particular pressure because of the financial commitments they have made to policyholders.
The EIOPA said companies whose financial positions fall short of the minimum required under Solvency II would not face immediate sanctions. However, they will have to satisfy regulators that they can shore up their capital buffers to withstand shocks.
A bigger group of insurers – 14 per cent – fell short of the “solvency capital requirement”, which adopts more stringent criteria than the “minimum” requirement.
The regulators indicated the companies with inadequate capital positions were relatively small. These 14 per cent of companies account for only 3 per cent of the sector’s total assets.
They, too, will face greater scrutiny by regulators. Stress tests showed that under a Japanese-esque scenario of prolonged low yields, the number of insurers whose capital positions fall short of the SCR would increase to 24 per cent.
The EIOPA said: “A continuation of the current low-yield conditions could see some insurers having problems in fulfilling their promises to policyholders in 8-11 years’ time.”
The body has issued recommendations to national regulators on how to deal with the problems, including assessing the sustainability of guaranteed investment returns that have been promised to life assurance policyholders.
Gabriel Bernardino, chairman of the EIOPA, said the measures “will ensure that the vulnerabilities identified are addressed and that follow-up actions by [national regulators] will be taken in a consistent way.”
Insurance Europe, the trade body, highlighted that the tests were based on companies’ financial positions before Solvency II had been implemented and had assumed the worst.
Olav Jones, deputy director-general at Insurance Europe, said: “The stresses used were very severe and covered all the major risks that insurers take on to protect their policyholders.
“The fact that the insurers’ capital went down after these kinds of severe events is quite normal, and it is very encouraging to see that even after such severe events generally companies will still be able to meet their full solvency capital requirements.”
He added that there was “still work for both the industry and national supervisors to do in preparation” for Solvency II.
Copyright The Financial Times Limited 2014.