European insurers and pension funds could run into difficulties because of low interest rates and fragile financial markets, the industry’s top regulator said.
“Weak economic prospects, grown economic imbalances and the likelihood of a prolonged low interest-rate environment create a significantly negative medium term outlook for the financial soundness of the European insurance and occupational pensions sectors,” the Frankfurt-based European Insurance and Occupational Pensions Authority said in a report today.
European insurers including Allianz SE, the region’s largest, Axa SA, Prudential Plc and Assicurazioni Generali SpA are under pressure as low interest rates around the world weigh on investment returns. Life insurers, which are especially vulnerable to swings in investment income, traditionally offer products with minimum return guarantees that exceed government bond yields of nations with a top credit rating such as Germany.
The European Central Bank on Dec. 6 cut its economic forecast for next year and left the benchmark interest rate at a record low of 0.75 percent. Weakness in economic activity will persist into next year, President Mario Draghi said, adding that risks to the outlook remain on the downside.
“Despite recent positive developments in financial market prices, action by the ECB and coordinated political initiatives, the risks to financial stability remain high,” Eiopa said.
The regulator’s analysis of pension fund data show “a worrying decrease” in funding positions, “especially for larger defined benefit systems such as those in the U.K. and the Netherlands,” it said, adding that the low yield environment is “a key driver.”
“Taking a longer-term, forward-looking perspective, improved longevity of pensioners will also weigh negatively on funding levels in the future,” Eiopa said.