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07/12/2016

EU insurance watchdog warns on low interest rate threat

Euro & Finance

EU insurance watchdog warns on low interest rate threat

simon_cunninghamflickr.jpg

[Simon Cunningham/Flickr]

Some European insurers could have trouble meeting financial obligations to policy holders in the coming years if rock bottom interest rates persist, the EU’s insurance watchdog EIOPA warned on Sunday (30 November).

“A continuation of the current low yield conditions could see some insurers having problems in fulfilling their promises to policy holders in 8-11 years’ time,” the European Insurance and Occupational Pensions Authority (EIOPA) said in a statement.

The watchdog has spent the last seven months testing how well insurers’ capital safety buffers hold up against hypothetical challenges, to determine whether policy holders could be at risk in a financial meltdown.

It did not name individual companies that fell short in its tests, in contrast to the European Central Bank’s review of banks that prompted a number of lenders to raise capital.

However, EIOPA said nearly one in four insurers would not meet its solvency capital requirement (SCR), a key regulatory threshold, in its “Japanese-like” test scenario, where interest rates remain low for a prolonged period of time.

ECB interest rates are effectively at zero, with further easing of credit conditions under preparation.

Low yields on relatively safe government and covered bonds hurt investment income at insurers, making their future obligations to policy holders increasingly strenuous to meet.

EIOPA’s baseline stress test showed that the insurance sector in general was well capitalised.

“Nevertheless, 14 percent of the companies representing 3 percent of total assets, had an SCR (solvency capital requirement) ratio below 100 percent,” EIOPA said.

The ABI association of British insurers said in a statement that EIOPA’s tests demonstrated that the European industry was “well placed … and ready to cope with the extreme situations tested.” 

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