EU insurers pass financial stress tests


Europe's insurers are able to withstand even a major financial crisis, an EU insurance watchdog has said, boosting industry hopes for less burdensome regulation.

The Committee of European Insurance and Occupational Pensions Supervisors (CEIOPS) unveiled the long-awaited results of its stress tests on insurers' ability to resist financial downturns on Tuesday (16 March).

CEIOPS concluded that the European insurance sector would be able to weather a financial market storm as severe as that which followed the Lehman Brothers collapse in 2008, or even worse.

European insurance federation CEA used the findings as support for its view that regulators should not to impose radically higher capital requirements on the sector.

''The results published today by CEIOPS confirm that the insurance sector is well capitalised, which is why it weathered the crisis overall remarkably well,'' CEA Deputy Director-General Alberto Corinti said in a statement.

Regulators and the European Commission are drawing up new rules – known as Solvency II – that will require insurers to match their capital more accurately with the risk on their books. The rules are due to come into force by 2013.

But the insurance industry is worried that the regulations will make insurers hold too much capital, forcing them to raise cash and crimp profit margins.

''Insurers believe that the new Solvency II regulatory regime should not entail a dramatic increase in capital requirements. The stress test results confirm this,'' said Corinti, who had been secretary-general of CEIOPS before switching to the industry.

European insurers last week attacked CEIOPS' proposals as being ''bad for consumers, bad for Europe's economy and bad for the insurance industry.''

CEIOPS responded that under-regulation, as well as over-regulation, must be avoided in the aftermath of the crisis.

Hypothetical hits

Insurance supervisors launched the stress tests last year to ensure that companies such as such as Allianz, AXA and Generali would be able to withstand a severe downturn, after a number of banks collapsed or had to be rescued during the crisis.

On Tuesday (16 March), CEIOPS said the tests showed that insurers could resist even a major financial crisis and still have enough capital to pay policy holders.

''Large and important European insurance groups would remain resilient even in severe scenarios," it affirmed.

''In all scenarios, the aggregated level of available capital exceeds the regulatory requirements,'' said CEIOPS, which includes regulators such as Germany's Bafin and the UK's Financial Services Authority.

The tests, based on data from June 2009, involved 28 important EU insurance groups and covered more than 60% of European insurance market premiums.

As part of the exercise, insurance companies calculated the impact of three scenarios on their solvency capital: a repeat of the 2008-2009 financial turmoil, a deep recession, and sudden inflation.

In the first scenario, which mirrored the fallout of the Lehman Brothers collapse, the insurers would have lost 10 billion euros – or about 3% of available capital.

They would have lost up to 25% of available capital in the deep recession and sudden inflation scenarios, CEIOPS said.

CEIOPS chairman Gabriel Bernardino said that the insurers held up well despite the hypothetical hits.

''All participating insurance groups held assets sufficient to cover policy holder liabilities,'' he said, adding that the improvement in financial markets since June 2009 meant that insurers probably built up further capital buffers.

''The Solvency II regime will also require a consistent measurement of assets and liabilities, thus making future European-wide stress tests more comparable," Bernardino added.

(EURACTIV with Reuters.)

In July 2007, the European Commission proposed a general revision of 30-year old rules governing European insurers' financial positions. The initiative has been labelled Solvency II, in reference to the current regulatory framework Solvency.

Solvency II proposes a new risk-based approach as an alternative to the existing flat-rate system. According to this new methodology, the greater the economic risk an insurer takes, the more capital the company would have to hold as a guarantee against default.

On 22 April 2009, after intensive negotiations between the Commission, the European Parliament and the European Council, the three institutions agreed on a compromise text for the Solvency II Framework Directive that was adopted by the Parliament's plenary session.

Subscribe to our newsletters