EU watchdog warns of bank-like risks for insurers

FRANKFURT Wed Nov 21, 2012 7:10am EST

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FRANKFURT (Reuters) - Insurers that venture into bank-like business activities in search of higher returns must realize they will be regulated like banks, the head of the European Union's insurance watchdog said on Wednesday.

Faced with low yields on huge investments in government bonds, insurers around Europe are moving into financing business traditionally dominated by banks, such as real estate.

"If insurance groups heavily develop their business into non-traditional or non-insurance activities then they should expect to be treated in relation to those businesses as if they were banks," Gabriel Bernardino, chairman of the European Insurance and Occupational Pensions Authority (EIOPA), said in a speech.

Europe's biggest insurer, Allianz, and other big players like Munich Re have been ramping up their presence in commercial real estate financing.

Insurers say income from real estate and infrastructure investments - from office buildings to gas grids - can help them match their commitments to policy holders, which can stretch over decades.

There is plenty of scope for insurers to take on this business because banks are constrained by their own tough new capital rules.

Bernardino said regulators needed to limit any potential incentives to transfer typical banking risks to insurers.

"We should be especially attentive to any kind of maturity transformation and leveraging occurring in the insurance sector," Bernardino said, referring to the basic components of banking activity.

Insurance companies involved in non-traditional or non‑insurance activities are more vulnerable to financial market developments and more likely to amplify systemic risk, Bernardino said.

EIOPA is working with counterpart regulators around the world on a list of so-called Globally Systemically Important Insurers that could threaten the stability of the international financial system if they were to get into trouble.

There is a similar list for big banks.

Bernardino also urged the European Commission, European Parliament and EU member states to break a deadlock over new capital rules for insurers known as Solvency II. He said uncertainty over the regulations was dogging insurers and tarnishing Europe's international credibility.

The Solvency II rules are designed to protect consumers by overhauling insurers' risk management systems, but the EU has been unable to agree on final details, leading to repeated delays.

"We need a strong commitment from the EU political institutions towards the implementation of Solvency II," Bernardino said. He said it was unlikely Solvency II could be brought in before 2016 but that EIOPA was looking at adopting some elements of the new rules before the start date.

(Reporting by Jonathan Gould. Editing by Jane Merriman)

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