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UPDATE 1-EU watchdog starts test of insurers' resilience to shocks
April 30, 2014 / 4:07 PM / 4 years ago

UPDATE 1-EU watchdog starts test of insurers' resilience to shocks

* Test includes adverse market scenarios, insurance shocks

* Results of EIOPA stress tests due in November

* EIOPA not expected to publish individual company results

* Industry worried test timetable is too tight (Adds industry comment, detail)

By Jonathan Gould

FRANKFURT, April 30 (Reuters) - Europe’s top insurance regulator on Wednesday launched the latest round of stress tests to gauge insurers’ ability to withstand shocks such as the recent financial markets crisis.

The European Insurance and Occupational Pensions Authority (EIOPA) will put insurers through their paces over the next few months to examine how well capital safety buffers hold up against hypothetical challenges and determine whether policyholders could be at risk if a financial meltdown occurs.

The insurance stress tests will run parallel to separate health checks of Europe’s biggest lenders before the European Central Bank takes over responsibility the region’s banking supervision in November.

“EIOPA’s stress test is focused on the overall resilience of the insurance sector in the EU and on the identification of its major vulnerabilities in the emergence of relevant shocks,” the watchdog’s chairman, Gabriel Bernardino, said in a statement.

Insurers have complained about the administrative and financial burden placed on them by regulators in the stress tests and in the switchover to new risk-based capital rules being phased in over the coming years.

At the same time, the tight timetable for the exercise presents a huge challenge for insurers, said Olav Jones, deputy director general at industry body Insurance Europe.

“We therefore hope that EIOPA will allow companies to perform it on a best-effort basis and to use some simplifications,” he said ahead of the EIOPA announcement.

EIOPA has devised scenarios to measure the effect on insurers of market volatility in government and corporate debt, equities, real estate and interest rates.

It will also examine specific insurance risks such as changes in longevity, reserves and natural catastrophes.

“The design and the magnitude of the shocks will properly stress insurance companies’ financial position,” Bernardino said.

EIOPA will also conduct a follow-up to an earlier study on the effects on insurers of a prolonged period of low interest rates.

Results of the stress tests, which will be based on the new Solvency II capital rules that come into force for insurers at the start of 2016, are due in November.

SMALL PLAYERS SQUEEZED

Big insurers such as Allianz, Axa, Generali and Prudential Plc are thought to be well prepared for both Solvency II and the stress tests.

“We will pass these tests without any problem,” Talanx Chief Executive Herbert Haas told Reuters last week.

However, smaller insurers have complained about the heavy investment required in IT and the risk-management expertise needed to comply with the new capital regime.

EIOPA’s previous stress exercise, conducted in 2011, showed that about 10 percent of the insurers tested did not meet the minimum requirement for regulatory capital under an adverse test scenario. Those 13 insurers were a combined 4.4 billion euros ($6.08 billion) short of the minimum, EIOPA found at the time.

EIOPA did not name the companies in 2011 and is not expected to do so this year.

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

By contrast, past European banking stress tests have exposed shortfalls at named lenders and forced many to raise equity capital and take other steps to plump their safety cushions.

EIOPA said its tests will give supervisors and companies the chance to see how the Solvency II rules work in practice and identify vulnerabilities to be addressed in future.

“The conclusions of the exercise will allow EIOPA and national supervisory authorities to define areas for further investigation and to focus supervisory responses,” EIOPA said. ($1 = 0.7237 Euros) (Additional reporting by Marcin Goclowski in Warsaw; Editing by Thomas Atkins and David Goodman)

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