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Most E.U. insurers pass Solvency II stress test

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FRANKFURT, Germany—The vast majority of European insurers and reinsurers remained financially “robust” in a test of their ability to withstand various economic shocks, but up to 10% failed to meet their minimum capital requirement under Solvency II, the European insurance regulator said.

In addition, experts say insurers need to make certain they are ready for the risk-based capital regulatory framework in whatever shape Solvency II comes into force, which is slated to begin in 2013.

The Frankfurt, Germany-based European Insurance and Occupational Pensions Authority said 221 insurance and reinsurance groups and companies in the European Union, the European Economic Area and Switzerland—with a market share of about 60%—took part in the study testing their ability to maintain minimum capital levels despite macroeconomic shocks that include inflation, interest rates, credit and insurance risks.

The exercise was intended to test the market's resilience to such shocks and how its capital position would change as a result of such events, EIOPA Chairman Gabriel Bernadino said this month.

Participating insurers' aggregate solvency surplus was E425 billion ($606.18 billion) before EIOPA applied the stress test scenarios.

Under a scenario of adverse macroeconomic deterioration, including interest rate and equity risks, the group's surplus fell to E275 billion ($392.23 billion) and 10% would fail to meet their minimum capital requirements under Solvency II, according to EIOPA.

Under a stress test to gauge insurers' reaction to inflation, their combined surplus fell to E367 billion ($419.35 billion) and 8% of participants would fail to meet minimum capital requirements under Solvency II, the insurance regulator said.

Mr. Bernadino declined to name companies that failed to meet the minimum capital requirements under the stress tests and pointed out that Solvency II still is a prospective regime that has yet to be finalized.

Still, the Brussels-based Comité Européen des Assurances, which represents insurers and reinsurers in Europe, said the results demonstrate the insurance industry's ability to withstand even severe economic shocks.

“It should also be borne in mind that the stress tests were based on an interim model” of Solvency II, CEA Director General Michaela Koller said in a statement. “The CEA has been and continues to submit technical feedback to EIOPA and the European Commission to finalize the details of the Solvency II regime.”

Because Solvency II rules have not been finalized, it is difficult to gauge the full significance of the stress test results, said Philippe Guijarro, an actuarial partner at PricewaterhouseCoopers L.L.P. in Edinburgh, Scotland.

While it may be comforting that up to 92% of insurers met the minimum capital requirement in the test, regulators are likely to require insurers to have even more capital—enough to ensure that bankruptcy occurs no more than once every 200 years with a 99.5% probability that insurers could meet their policyholder obligations for the next year, Mr. Guijarro said.

In addition, he said the stress test scenarios were “relatively light” in the intensity of the macroeconomic shocks.

While some companies may have considered the stress tests to be an “exercise in futility” because Solvency II is not yet finalized, the results likely will generate further discussion and industry lobbying concerning changes it would like to see before the rules are finalized, Mr. Guijarro said.

That up to 10% of insurers failed to meet minimum capital requirements under the Solvency II stress test is a concern, said Marc Beckers, London-based head of Aon Benfield Analytics for Europe, the Middle East and Africa, an Aon Corp. unit.

Worrying is that the insurers and reinsurers tested in EIOPA's study represent at least 50% of the premium volume per country and likely are the largest companies in their countries, yet 10% failed to meet the minimum capital requirement under the adverse stress scenario, he said.

In a report, Dominic Simpson, senior credit officer at Moody's Investors Service Inc. in London, said the stress test results showed resilience by the overall European insurance industry.

The 40% of insurers that did not take part in the test likely were smaller and less diversified businesses that would be “more disposed to stress test failure,” he said.

The lack of company-specific information makes it difficult to draw detailed conclusions from the test or determine where potential problems may occur, Messrs. Simpson and Beckers agreed.

In a statement, Peter Vipond, director of financial regulation and tax at the London-based Assn. of British Insurers, which represents U.K. insurers and reinsurers, said the test demonstrated the strength and stability of the industry.

“As far as we are aware, no U.K. firm failed this stress test,” Mr. Vipond said in a statement.