Big EU Insurers Pass Stress Tests

By | March 17, 2010

Europe’s insurers are able to withstand even a major financial crisis, an EU watchdog said on Tuesday, boosting industry hopes for less onerous regulation.

EU insurance watchdog CEIOPS, (the Committee of European Insurance and Occupational Pensions Supervisors) unveiled the long-awaited results of its stress tests of how insurers would weather another financial market storm like that which followed the collapse of Lehman Brothers in 2008, or worse, saying the tests showed big groups could resist even severe downturns.

European insurance trade body CEA seized on the findings as backing its view that regulators ought not to impose radically higher capital requirements on the sector [See also IJ web site – .].

“The results published today by CEIOPS confirm that the insurance sector is well capitalized, 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, which will require insurers to more accurately match the amount of capital they hold 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 crimping 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 industry.

The 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 wake of the crisis.

Insurance supervisors launched the stress testing last year to be sure that insurance companies such as Allianz, AXA or Generali would be able to withstand a big downturn after a number of banks collapsed or had to be rescued in the crisis.

On Tuesday, CEIOPS said the tests showed insurers could resist even a major financial crisis and still have enough capital to pay policyholders. “Large and important European insurance groups would remain resilient even in severe scenarios,” it said in a statement.

“In all scenarios, the aggregated level of available capital exceeds the regulatory requirements,” said CEIOPS, a body in which insurance regulators such as Germany’s Bafin or the UK’s Financial Services Authority work together.

The stress tests, based on data from June 2009, included 28 important European insurance groups and covered more than 60 percent of European insurance market premiums.

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

In the first scenario, which mirrored the ructions following the collapse of Lehman Brothers, the insurers tested would have lost €10 billion ($13.78 billion) or about 3 percent of available capital, CEIOPS said.

They would have lost up to 25 percent of available capital in the deep recession and inflation scenarios.

CEIOPS chairman Gabriel Bernardino said the insurers held up well despite the hypothetical hit. “All participating insurance groups held assets sufficient to cover policyholder liabilities,” he said, adding that the improvement in financial markets since June last year meant insurers probably further built up their 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 said.

(Editing by Will Waterman)

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