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EU watchdog expects quick action from insurer stress tests

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[December 01, 2014] By Jonathan Gould

FRANKFURT (Reuters) - The European Union's insurance watchdog said on Monday it expected rapid action from insurers and supervisors to address weaknesses in capital and business models it had identified in a series of stress tests.

In findings released on Sunday, the independent body said nearly one in four European insurers could have trouble meeting obligations to policyholders in coming years if the era of wafer-thin interest rates continues.

"From now until the end of next year, we are going to see a flow of actions - possibly capital in some situations - but also other types of balance sheet management," Gabriel Bernardino, chairman of the European Insurance and Occupational Pensions Authority (EIOPA), told a news conference.

Unlike the European Central Bank's stress tests for the banking sector, completed in October and prompting capital raisings by lenders, EIOPA did not release the names of individual companies that fell short in its tests.

Bernardino also played down prospects that financial markets would try to pressure insurers to raise capital.

"We don't have the expectation that the market will want to close the gap immediately," Bernardino said.

National insurance supervisors would use the stress test results to home in on weaker insurers, seeking to correct mismatches in their assets and liabilities, reviewing their product mixes and risk management and encouraging changes to their business models, he said.

In its report, EIOPA said 24 percent of insurers would not meet its solvency capital requirement (SCR), a key regulatory threshold, in a "Japanese-like" scenario of prolonged low interest rates.

"A continuation of the current low yield conditions could see some insurers having problems in fulfilling their promises to policy holders in 8-11 years' time," the watchdog said.

ECB interest rates are effectively at zero, with further easing of credit conditions under preparation.

Low yields on relatively safe government and covered bonds hurt insurers' investment income, making it increasingly difficult to meet future obligations to policy holders.

The companies most at risk were those with a mismatch in the maturity of their assets and liabilities and life insurers that had given long-term guaranteed interest rates on savings policies, it said, pointing to insurers in Austria, Germany, Malta and Sweden as showing the biggest vulnerability.

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DOUBLE-HIT SCENARIO

EIOPA calculated a baseline for its tests using insurance capital safety rules known as Solvency II, which take effect in January 2016. That baseline showed the sector was generally well capitalised, though some firms came up short even before the stress test scenarios.

"Nevertheless, 14 percent of the companies, representing 3 percent of total assets, had an SCR (solvency capital requirement) ratio below 100 percent," EIOPA said.

Industry observers say big diversified insurers such as Allianz  Axa and Generali are well prepared for Solvency II rules.

Smaller firms appeared more at risk in its most severe "double-hit" stress scenario, involving a drop in asset values combined with a rise in the value of future obligations.

EIOPA said 60 insurance groups and 107 individual companies took part in its core stress test, representing 55 percent of premiums at the EU level. Companies from all 28 EU member states, plus Norway, Switzerland and Iceland were involved.

(Editing by Jeremy Gaunt)

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