EU insurance watchdog warns on low interest rate threat

Sun Nov 30, 2014 4:21pm EST
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By Jonathan Gould

FRANKFURT (Reuters) - Nearly one in four 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 said on Sunday.

The watchdog spent seven months testing how well insurers' capital buffers would hold up in hypothetical challenges, to see if policy holders could be at risk in a financial meltdown.

"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.

EIOPA did not name the companies that failed its tests, in contrast to the European review of banks that prompted several lenders to raise capital.

However, EIOPA said 24 percent of insurers would not meet its solvency capital requirement (SCR), a key regulatory threshold, in its "Japanese-like" scenario where interest rates remain low for a prolonged period.

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 insurers' investment income, making it increasingly difficult to meet future obligations to policy holders.

The companies most at risk were those with a mismatch in the maturity of their assets and liabilities and life insurers that had given long-term guaranteed interest rates on savings policies, it said.   Continued...

A machine counts and sorts out euro notes at the Belgian Central Bank in Brussels October 26, 2011. REUTERS/Thierry Roge