LONDON, Dec 15 (Reuters) - Insurers may have to scrap dividends after a test of their ability to withstand severe market shocks uncovered a 160 billion euro ($165 billion) hole in balance sheets, the European Union’s insurance watchdog said on Thursday.
The European Insurance and Occupational Pensions Authority (EIOPA) published anonymised and aggregated results of this year’s stress test of 236 insurers.
The results show national supervisors need to respond with measures including possible cuts in maximum guaranteed returns for policyholders, it said.
“The results of this year’s EIOPA stress test confirmed the significant challenges for the European insurance sector triggered by the current macro-economic environment,” EIOPA Chairman Gabriel Bernardino said in a statement.
EIOPA said it will check how national regulators implement its recommendations to ensure a “coordinated response to situations that may pose a threat to the viability of the supervised entity and, collectively, to the system as a whole”.
The stress test, taken every two years, simulates two extreme, theoretical shocks to see how insurers could cope.
The first scenario focused a prolonged period of low yields and lack of long-term investment opportunities - an extreme version of what is already happening in markets, making it harder for insurers to earn enough to cover policy payouts. Insurers showed a 100 billion euro hit to balance sheets under this scenario.
Under a second, “double hit” scenario of prolonged low interest rates and a plunge in asset prices, the hit rose to 160 billion euros.
EIOPA issued a range of recommendations for national regulators, such as requiring firms to review or cut guaranteed returns on some policies, and cancel or defer dividends if a business model is at risk.
The sample of companies tested included the region’s biggest insurers, as well as small and medium sized firms, covering both life and general insurance.
The watchdog’s 2014 stress tests showed that with prolonged low interest rates, nearly one in four insurers would not meet their Solvency Capital Requirement - the regulatory benchmark - and some could face problems in meeting promises to policy holders within 8-11 years. ($1 = 0.9647 euros) (Reporting by Huw Jones)