(Bloomberg) — One in four European insurers may struggle to meet promises to policyholders in a prolonged period of low interest rates, the European Union’s insurance watchdog said following a stress test of the industry.
These insurers will need to raise capital and watch their balance sheets and investments more closely, the European Insurance and Occupational Pensions Authority, or Eiopa, said today during a conference call from Frankfurt. It has been running tests on the industry since April to see how it would be hurt if interest rates remain low for the foreseeable future.
About 24 percent of insurers wouldn’t meet their solvency capital ratio in a Japanese-style low-yield environment, which could leave some struggling in eight to 11 years, the regulator said. The capital shortfall under the low interest rate scenario is about 8.3 billion euros ($10.3 billion) and the companies, which it didn’t identify, will need to close this gap.
“We recommend national authorities to examine thoroughly the asset, liability and the risks management strategies and practices of these insurers,” Gabriel Bernardino, chairman of Eiopa, told reporters during the conference call. If companies continue with an “unsustainable business model,” then local regulators should intervene to protect policyholders.
In general, the test showed the industry is “sufficiently capitalized,” Eiopa said.
The European Union plans to introduce risk-based capital requirements for insurers starting in 2016. Called Solvency II, the rules specify how much carriers such as Allianz SE or Axa SA must hold to meet future obligations and to safeguard customers’ money.