April 28, 2014 / 8:06 PM / in 4 years

REUTERS SUMMIT-Low interest rates a focus in EU insurers health check

(For other news from Reuters Financial Regulation Summit, click here)

* EU insurance test results due in November

* Heavy focus on impact of low interest rates

* Regulator warns over going easy on securitisation

By Jonathan Gould and Huw Jones

FRANKFURT/LONDON, April 28 (Reuters) - European insurers will be tested to see whether they could stay in business even if interest rates remained at historic lows for a long time, a top regulator said on Monday.

Low interest rates make it harder for insurers to generate income from the assets they hold, thereby raising questions about their ability to pay out on customer policies.

The results of the test conducted by the European Insurance and Occupational Pensions Authority (EIOPA) over coming weeks will be published in November.

The regulators are, however, still undecided over how detailed the public results should be, said Gabriel Bernardino, chairman of EIOPA, which is a European Union watchdog.

“This is not about the individual failure of companies. This is not a pass/fail test,” he told the Reuters Financial Regulation Summit on Monday.

“We are still discussing the level of granularity that we will bring in the report. There will definitely be more information than we provided last time,” Bernardino added, referring to the previous stress test in 2011.

He was speaking on the day before another EU watchdog, the European Banking Authority, is due to publish its stress test for 124 leading banks in the 28-country bloc to see if they have enough capital to survive a string of markets shocks.

The outcome of that test will be published bank by bank in October to tell markets exactly how each lender fared and if it needs to raise new capital.

Holding a similar test for insurers would put pressure on regulators not to include “really severe stresses”, Bernardino said.

“We are not trying to second guess capital requirements. I am happy with the severity of the test that we are going to do.”

Bernardino said the test won’t be a “moment in time” snapshot but will give EIOPA data to show resilience over time, though it would be for national watchdogs to take action if a specific firm needs to raise capital.

The test will look at how insurers could cope with theoretical stresses such as falls in the value of government and corporate bonds and shares.


EIOPA will also bolt on a “low yield” scenario to the main test to help it decide what to do, if anything, about the impact of continued low interest rates.

The test will be completed in June and then over the summer the results will be scrutinised by national regulators and, for the first time, at the EU level as well, meaning EIOPA can challenge some of the figures insurers come up with.

EIOPA is due to publish the actual test scenarios this week and the exercise will cover at least half of the life and non-life insurance sectors in each of the 28 EU member states.

Separately, EU policymakers are looking to EIOPA to help with their efforts to revive securitisation, the market for bundling loans into bonds to raise funds for aiding economic growth.

The sector was tarnished after loans based on U.S. subprime mortgages turned toxic in 2007 to trigger a wider financial crisis and send securitisation in Europe into hibernation.

Bernardino warned that being too lenient over how much capital insurers should set aside to cover purchases of even top quality securitised debt could backfire.

Regulators should focus on setting capital requirements in line with actual risks, with this calibration based on evidence or else prices could be distorted to create bubbles, he said.

EIOPA has proposed a halving of capital requirements for top quality securitised debt but it will be up to the EU’s executive European Commission whether to endorse this or cut the amount further.

“I would definitely not advocate specific, privileged treatment. There are many other tools that can be used from governments, from a political perspective, to push for growth in certain areas,” Bernardino said.

“We are not the Taliban of calibrations. What we want is how best to recognise risks. We are prepared, in a couple of years by having better data in some types of investments, to come with a recalibration, but we should always calibrate with evidence,” Bernardino said.

Follow Reuters Summits on Twitter @Reuters_Summits (Editing by Erica Billingham)

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