(Reuters) — A drop in capital buffers reported by Dutch insurers has raised concern over how well prepared the broader European insurance industry is for revised rules on the amount of money they need to hold in case of market shocks.

Nationalized Dutch insurer ASR Nederland N.V. said last week its available capital would fall sharply under the Solvency II rules coming into force in January 2016. Similar warnings from listed Dutch companies Aegon N.V. and Delta Lloyd N.V. prompted steep falls in their share prices.

As the deadline nears, markets are looking closely at firms' capital reserves, fretting that too thin a cushion might fall foul of regulators, limiting their ability to return capital to shareholders through dividends and share buybacks.

It might even mean that insurers have to sell assets or raise capital to boost reserves, much like banks have already been forced to do. Twelve European banks raised a combined €15 billion ($16.78 billion) last year to address capital shortfalls.

"The market is worried that there will be some catastrophe — some capital-raising that is necessary," said Société Générale analyst Nick Holmes. "The numbers are opaque, and that creates confusion and fear that something bad is going to happen that no one has identified."

Regulators have said privately they fully expect markets to put pressure on insurers to spell out when and how they will comply with the new rules, rewarding those who dispel doubts about their health well ahead of any formal deadline.

European insurance stocks have dropped 13% since April, when the International Monetary Fund warned low interest rates could hit their solvency levels.

Creating their own models

Under Solvency II, operational, underwriting and asset risks are assessed and then insurers express their capital levels as a ratio against the levels required to cover potential liabilities.

The assets in which an insurer invests to ensure they have enough money to pay out future claims are graded according to how risky they are. The riskier the asset, the more money an insurer will need to put aside.

In practice, that means illiquid assets, which could be hard to value and sell in a downturn, are treated more harshly than liquid, listed blue-chip stocks and government bonds.

While regulators have created a standard model with which to assess an insurer's risks, many have taken up the option to create their own internal model, expecting that it will give a more appropriate and favorable assessment.

Adding to the pressure for those hoping to use their own internal models is uncertainty over how to assess government debt, traditionally the safest of market bets.

Europe's debt crisis has radically changed the market's perception of that risk, but the rules laid down by the E.U.'s insurance supervisor, the European Insurance and Occupational Pensions Authority, says they are still risk free.

In response, and until the rules are clearer, companies such as Germany's Allianz S.E. are proposing to assign their own risk weightings to eurozone government bonds outside their home base.

Large insurers across the continent are waiting for approval of their own solvency models before they can relay accurate information on their capital position to investors.

Most of these internal models are not expected to be vetted by regulators until at least November, and insurers do not need to publish their capital ratios until next year. Full implementation is not demanded for up to 16 years.

Gold-plating

Preparations for the launch have been hampered by "gold-plating" — the application of very strict criteria or extra reporting requirements — by some domestic regulators, insurance trade body Insurance Europe said.

Some, including the Dutch regulator, want insurers to take more account of rock bottom interest rates when assessing future liabilities. Low rates now magnify the capital needed against those liabilities.

The Dutch regulator rejected claims it was being tougher than others.

A ratio of 100% means insurers are exactly fulfilling their solvency capital requirements. European regulators have indicated they want to see a figure well above that level, without giving a specific target.

Aegon and Delta Lloyd, which are both waiting for their internal models to be approved, said their ratios could be around 140%. This compares with indicative ratios of more than 200% for some German insurers.

When announced alongside recent earnings, the indicated solvency levels prompted a 43% slide in Delta Lloyd's share price and a 20% drop in Aegon's.

Felix Hufeld, the head of Germany's financial market watchdog Bafin, said it is not surprising that investors and analysts are having trouble coming to grips with a sea change in insurance regulation that is the equivalent of banking reforms Basel II and Basel III rolled into one.

"It will take one or two years before people have a level of comfort with the new rules and uncertainty about them declines," Mr. Hufeld told Reuters.