By Jonathan Gould
FRANKFURT (Reuters) - Nearly one in four European insurers could have trouble meeting financial obligations to policy holders in the coming years if rock bottom interest rates persist, the EU's insurance watchdog EIOPA said on Sunday.
The watchdog spent seven months testing how well insurers' capital buffers would hold up in hypothetical challenges, to see if policy holders could be at risk in a financial meltdown.
"A continuation of the current low yield conditions could see some insurers having problems in fulfilling their promises to policy holders in 8-11 years' time," the European Insurance and Occupational Pensions Authority (EIOPA) said in a statement.
EIOPA did not name the companies that failed its tests, in contrast to the European review of banks that prompted several lenders to raise capital.
However, EIOPA said 24 percent of insurers would not meet its solvency capital requirement (SCR), a key regulatory threshold, in its "Japanese-like" scenario where interest rates remain low for a prolonged period.
ECB interest rates are effectively at zero, with further easing of credit conditions under preparation.
Low yields on relatively safe government and covered bonds hurt insurers' investment income, making it increasingly difficult to meet future obligations to policy holders.
The companies most at risk were those with a mismatch in the maturity of their assets and liabilities and life insurers that had given long-term guaranteed interest rates on savings policies, it said.
EIOPA will had a news conference about the results at 0800 GMT in Frankfurt on Monday.
DOUBLE-HIT SCENARIO
EIOPA calculated a baseline for its tests using insurance capital safety rules known as Solvency II, which take effect in January 2016. That baseline showed the sector was generally well capitalised, though some firms came up short even before the stress test scenarios.
"Nevertheless, 14 percent of the companies, representing 3 percent of total assets, had an SCR (solvency capital requirement) ratio below 100 percent," EIOPA said.
Industry observers say big diversified insurers such as Allianz (DE:ALVG), Axa (PA:AXAF) and Generali (MI:GASI) are well prepared for Solvency II rules.
EIOPA concluded that smaller firms appeared more at risk in its most severe "double-hit" stress scenario, involving a drop in asset values combined with a rise in the value of future obligations.
Industry lobby group Insurance Europe said the tests demonstrated insurers' resilience ahead of the implementation of Solvency II.
"The stresses used were very severe and covered all the major risks that insurers take on to protect their policy holders," said Insurance Europe Deputy Director General Olav Jones.
EIOPA said 60 insurance groups and 107 individual companies took part in its core stress test, representing 55 percent of premiums at the EU level. Companies from all 28 EU member states, plus Norway, Switzerland and Iceland were involved.
(Editing by Emma Thomasson and David Clarke)