Are the accounting practices of insurers sufficiently transparent?

Are the accounting practices of insurers sufficiently transparent?

The European Insurance and Occupational Pensions Authority (EIOPA) warns that insurers' accounting practices are too opaque and fail to highlight the damage caused by low interest rates. Adam Bogdanor of Berwin Leighton Paisner suggests how the risks could be minimised.

Original news

Insurers' accounts hide the dangers of interest rates, LNB News 13/12/2013 1

Financial Times, 13 December 2013: Insurers' accounts are failing to show the effect of persistently low interest rates, a European regulator has warned. The comments were made after a 15 year project to reform the sector was halted by a dispute between the insurance sector and regulators.

What are the regulators' concerns?

In its second half 2013 financial stability report, EIOPA says the main risks facing European insurers are mostly unchanged and their financial position is relatively stable. However, challenges remain. EIOPA describes the 'most prominent risk' as being low interest rates, which is a particular issue for life insurers and occupational pension funds.

What are the main difficulties insurance companies face due to low interest rates?

Low interest rates create a number of issues for insurers, especially life insurers which offer guarantees to policyholders:

  • the lower the interest rates, the higher the premium required to fund the same level of policyholder benefits
  • lower interest rates generally mean lower policy benefits such as annuity rates for the same level of premium, reducing demand for the product
  • the duration of a life insurer's assets are often shorter than its liabilities (a significant issue in Germany) and this duration mismatch means a decline in interest rates increa

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