Analysts and others have started looking closely at the results of an insurance stress-test released by Europe’s top regulator on Monday amid growing concerns over the financial strength of the sector after 13 companies failed the test.
The test was conducted on 129 companies that found them too benign. However, what has alarmed people that took a closer look at the results is not the number of companies failed the test, but the failure by these companies to meet the minimum capital requirements set for the industry.
Ratings agencies, investors and analysts are more interested in the so-called ‘solvency capital requirement’ which is two to three times the minimum capital requirement. The entire industry may have breached this requirement in aggregate, they observe.
“That doesn’t exactly paint a healthy capital position given that the stress is not extreme and excludes sovereign risk”, said JP Morgan analyst Duncan Russell.
The European Insurance and Occupational Pensions Authority, one of three new super regulators, had asked the industry to conduct four different scenarios using financial data from the end of 2010.
The adverse scenario, which considers the worst case situation, had considered a relatively modest 15 percent decline in stock market, much less than the slump witnessed in 2008 or the dotcom bust.
Alarmingly, about 10 percent or 13 companies of the total participants in the stress test failed to meet the minimum capital requirement (MCR) on the adverse test, while 11 companies failed to clear the baseline test, which considers a stock market slump of 7.5 percent.
It is rumoured that the bigger listed companies have cleared the test while the smaller mutuals went down.
“However, the MCR is the absolute minimum capital requirement, the level below which, for example, authorisation is likely to be withdrawn and/or the business wound up”, said Deutsche Bank analyst Oliver Steel.
“The solvency capital requirement (SCR) is a more ‘normal’ target level. Mild supervisory intervention begins when that level is breached, increasing in intensity as the company moves further towards the MCR”, he added.