European Insurance Risks Shifting, CEIOPS Sees No Overall Rise

June 30, 2010

Overall risks facing the European insurance sector may not have significantly increased in the first half of 2010 but they have changed in their nature, the European Union’s insurance watchdog said on Tuesday.

“For the next twelve months, some risks are expected to increase, especially regulatory and reporting changes as well as tax and pension reforms, claims inflation and reserve risk,” the Committee of European Insurance and Occupational Pensions Supervisors (CEIOPS) said in its semiannual financial stability report.

Offsetting this were diminishing risks from falling consumer confidence and interest rates and from equity markets, CEIOPS said, based on a survey of its member financial regulators such as Britain’s FSA and Germany’s Bafin.

CEIOPS and the European Commission have been working to draw up new rules, known as Solvency II, which will more accurately match the capital insurers hold with the risks on their books. The rules are expected to come into force at the start of 2013.

The solvency positions of European insurers improved slightly last year on the back of recovering financial markets after deteriorating in 2008 but risks still abound, said the Committee, which is due to become a powerful authority under a post-crisis revamp of financial supervision in Europe.

“The insurance industry as a whole faces several risks and challenges going forward, of which the most prevalent are financial risks, in particular the risk of low or even again decreasing interest rates as well as risks related to depressed equity markets and volatility of credit spreads on bond instruments,” it wrote.

“A prolonged period of economic recession would be particularly challenging for the underwriting performance.”

CEIOPS reported that there had been 14 insolvencies, mainly of small insurers, in nine countries during the crisis, but said that most insurers now had sufficient shock-absorption capacity to see them through a recession, a view that echoed that of the European Central Bank.

Low interest rates cut the return that insurers make on their investments, making it difficult for them to service guaranteed life insurance policies, for example.

Recessions also tend to boost insurance policy cancellations and fraudulent claims, as well as cutting demand for cover from insurers such as Allianz, AXA or Generali.

(Reporting by Jonathan Gould; Editing by Phil Berlowitz)

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