Low Rates Biggest Risk for Europe's Insurers, Eiopa Says

Low interest rates are the biggest risk for European insurers and pension funds, weighing on sales of retirement products, the region’s top industry supervisor said.

Interest rates are “putting pressure mostly on life insurers’ and occupational pension funds’ ability to pay guaranteed rates of return and to maintain strong profitability and financial profiles in the long-run,” the European Insurance and Occupational Pensions Authority said in its financial stability report on the industry published today.

Insurers, which typically invest the majority of capital in fixed-income securities, are seeing earnings depleted by years of record-low interest rates. To help cope with the challenge, firms including Allianz SE (ALV), Europe’s biggest insurer, and Munich Re (MUV2), the world’s largest reinsurer, introduced new life insurance products in July that offer clients reduced interest rate guarantees.

The companies are cutting back guarantees in traditional life insurance and focusing more on unit-linked products, Eiopa said, adding that Solvency I capital levels for life and non-life carriers “are dropping, but remain well above the 100 percent minimum requirement.”

Reinsurers, which help primary insurers shoulder risks, are facing “a strong competitive environment” because of competing capital from insurance-linked securities such as catastrophe bonds, Eiopa said.

“Developments in insurance-linked securities also need close monitoring by supervisors as the extensive usage of ILS tends to cloud the picture in terms of understanding the risk transfer,” Eiopa said.

To contact the reporter on this story: Oliver Suess in Munich at osuess@bloomberg.net

To contact the editor responsible for this story: Frank Connelly at fconnelly@bloomberg.net

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