FRANKFURT Allianz (ALVG.DE), Europe's biggest insurer, has begun applying a notional charge in its accounts to reflect the risk of holding government bonds as investments, drawing a lesson from the euro zone debt crisis that may prompt others to follow suit.
Government bonds, which account for the lion's share of insurers' investments, are treated as risk free by regulators.
But the fallacy of that position became clear when the specter of default threatened a number of European countries in the wake of the financial crisis.
Regulators are still putting out fires from that crisis and are not expected to tackle the risk-free status of government bonds soon.
However, Allianz said it was right to take a more cautious line now, by effectively setting aside some capital to cover the risks of holding government debt.
Partly as a result of the new position, the German insurer said its economic solvency ratio - a measure of its capital strength - had been recalculated to 194 percent at the end of last year, compared with a previously assumed 222 percent.
The ratio had risen to 203 percent at the end of the first quarter, Allianz Chief Financial Officer Dieter Wemmer told a conference call.
"It is a very conservative approach as I doubt a lot of our peers would have done the same," Wemmer said.
He urged regulators to enforce a similar policy across the industry to ensure a level playing field.
"It would not be a fair comparison if the German regulator would force us to compete in Southern Europe with a charge on government bonds where the rest of the market does not have this charge," he said.
The charge Allianz is putting on government bonds - consisting of credit and spread risk charges - makes up 15 percentage points of the total solvency ratio, Wemmer said.
Financial regulators and the industry are still wrestling with ways to treat government bonds.
"Banks in their internal models are not yet putting a charge on government bonds, although that is also a discussion the world of banking regulation," Wemmer said.
While new risk capital rules for insurers - known as Solvency II and due to take effect in 2016 - have been broadly agreed, many details have yet to be worked out.
Allianz plans to update its internal model quarterly as regulators refine their capital rule requirements, Wemmer said, adding it would probably take a further four to five quarters before things were settled.
(Reporting by Jonathan Gould; Editing by Thomas Atkins and Mark Potter)