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European insurers well-prepared for economic turmoil, trade bodies say

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European insurers well-prepared for economic turmoil, trade bodies say

European insurers are well-prepared to weather economic turmoil due to Solvency II capital rules, trade bodies say, despite warnings that prolonged low interest rates could drastically reduce the excess of assets over liabilities on their balance sheets.

A stress test by the European Insurance and Occupational Pensions Authority has warned that insurers could see €100 billion wiped off their balance sheets in a lengthy low-yield environment. In a "double hit" scenario of prolonged low rates plus a sudden increase in risk premia, they could see a hit of as much as €160 billion.

But industry bodies say insurers are well-positioned to cope with the kind of shocks that the EIOPA stress test modeled thanks to Solvency II, a directive that came into force at the beginning of 2016 and dictates the amount of capital they must hold.

"The new Solvency II regime already requires insurers to hold high levels of capital to deal with unexpected stresses, and these tests assessed a combination of extreme shocks on top of that," said Steven Findlay, assistant director and head of prudential regulation at the Association of British Insurers. "For that reason, the results are particularly reassuring for customers."

Olav Jones, deputy director general of industry body Insurance Europe, agreed that actions taken by insurers in order to comply with the new directive were already offering a considerable level of protection against shocks.

"While Solvency II has only been in force for just under one year, it has set the bar very high in terms of the strict requirements insurers need to meet," he said. "This already includes capital requirements for low interest rates and reductions in the value of insurers' investments, as well as all the other risks to which insurers can be exposed."

He added that Solvency II also includes strict risk management and governance requirements so that management can take any necessary actions early.

"It also features extensive reporting and powers of intervention to ensure that supervisors can identify and monitor companies with specific issues and step in to take action, if needed," he said.

Jones said he was "puzzled" by the "long list" of supervisory actions that the EIOPA wanted national regulators to take, including reviewing firms' models of management behavior and requesting limits on dividends when the viability of a business model is at risk.

Insurers in the Netherlands are particularly vulnerable to the effects of low interest rates thanks to their relatively high levels of long-term pension and life insurance exposure, but have already covered themselves properly for a prolonged low interest rate environment under Solvency II rules, according to a statement from the Dutch Association of Insurers.

But EIOPA Chairman Gabriel Bernardino said the stress test highlighted "significant challenges" created by the macroeconomic climate.

Under the double-hit scenario, 40% of insurers tested would lose over a third of their assets, according to the EIOPA.

Echoing Bernardino's concerns, a Dec. 16 note from S&P Global Ratings warned that EMEA insurers would face a challenging year as a result of low yields in 2017.

However, most of the insurers in the region rated by the agency have a stable outlook, and average creditworthiness is expected to remain strong in the next two years, insurance analyst Lotfi Elbarhdadi said in the note.

S&P Global Ratings and S&P Global Market Intelligence are owned by S&P Global Inc.