European life policyholders may be in for an unpleasant surprise. European Union (EU) insurers could be planning to shift losses they are being compelled to accept from euro zone sovereign debt to customers who hold policies, rather than be forced to raise additional capital.
The total? Policyholders could be on the hook for approximately two-thirds of a whopping 8% of southern European sovereign debt, or approximately 235 billion euros (USD $335 billion).
A majority of bonds held by insurers, according to a Bloomberg report Friday, are used to back what are called “with-profits” life insurance policies, in which gains and losses on investments are shared by both customers and insurers. That means that insurers can shore up their positions by passing along losses from Greek, Spanish, Portuguese, Italian and Irish bonds—and customers will be vulnerable.
Guillaume Prache, managing director of the Brussels-based European Federation of Investors, an organization that represents two million retail investors, was quoted in the report saying, “Policies are written against the general account of the insurers so basically they have all the flexibility they want to assign any losses on assets to policyholders.” Customers, he added, “are very badly informed on the exposure and the risk that represents.”
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An added irony is that this ability to pass along losses to customers makes insurers more attractive to investors than banks, which also are suffering through the debt crisis. David Moss, who helps manage 8 billion pounds ($13 billion) in European equities at F&C Asset Management Plc (FCAM) in London, said in the report, “Insurers have fallen like banks all the way through this crisis. We think that’s unfair because they can share a proportion of any losses with policyholders.”