Insurers’ accounting practices are so opaque there is a danger their financial disclosures are failing to show the damage done by persistently low interest rates, top European regulators have warned.

Supervisors have raised fresh concerns about insurers’ bookkeeping across much of the continent, as a 15-year effort to reform the sector’s accounting rules remains held back by a dispute between the industry and standard-setters.

“There is a real risk that firms could build up hidden problems,” said the European Insurance and Occupational Pensions Authority on Thursday in a report on financial stability.

The warning came as industry-wide figures stressed the difficulties low interest rates are causing insurance companies. The problems are especially acute for life assurers that need to generate investment returns to meet promises made to policy holders.

EIOPA disclosed that investment returns for typical European life assurers – whose portfolios are dominated by conservative fixed income assets – have dropped more than two-fifths over the past year, to 2.8 per cent.

This means some companies in the sector are earning less from their investment portfolios than the returns – of as much as 4 per cent a year – they have guaranteed policy holders.

The problems associated with low interest rates may be slow to emerge on insurers’ books, however, EIOPA said.

In most jurisdictions insurance liabilities are valued using discount rates calculated at the time policies were written, rather than reflecting prevailing market conditions.

“The fact that the effects of low interest rates are slow to emerge in balance sheet terms does not mean the problem is not there,” EIOPA said. “The low interest yield environment is still the most prominent risk” for the sector, it added.

Leading accountants have estimated the bookkeeping shortcomings could mean insurance companies’ disclosures underestimate their liabilities by billions of euros, but that the effect is difficult – if not impossible – to quantify.

EIOPA added that the levels of capital held by insurers under the so-called Solvency I regulatory requirements, which are being phased out, were “dropping” but nevertheless remained “very healthy”.

European life insurers on average hold twice as much capital as they need to under the Solvency I rules.

Even so, the authority – which is planning to conduct stress tests of European insurers next year – indicated that if calculated using the forthcoming Solvency II regulations, the companies’ financial positions may not appear to be so strong.

Although insurers’ capital requirements are finally being reformed after years of delays, proposed accounting rule changes are still being contested.

The International Accounting Standards Board has been trying for years to make insurers’ accounts more comprehensible to investors and in June drew up a fresh set of proposals to satisfy the industry.

However, insurers are still worried the proposals will make their profitability appear artificially volatile.

The trade body Insurance Europe has warned the proposals are “not appropriate as [they] will not provide a suitable basis to explain our business performance to our investor community”.

The IASB is now considering the industry’s responses to a consultation it held in recent months. The reforms are unlikely to be introduced before 2018.

Meanwhile, EIOPA also warned on Thursday about the dangers of a flood of money pouring into the non-life industry from mainstream investors who are buying esoteric “insurance-linked” securities.

In its report, the authority said investors such as pension funds did “not necessarily having the modelling capabilities and experience to fully analyse the underlying risks and complexity of the insurance market.”

It added: “Without adequate supervision, such developments could cause systemic risk.”


Letter in response to this report:

Proposal will create another problem / From Mr Steve Roder

Get alerts on European Insurance & Occupational Pensions Authority when a new story is published

Copyright The Financial Times Limited 2019. All rights reserved.
Reuse this content (opens in new window)

Follow the topics in this article