Market Report: Europe - European insurers facing EUR100bn capital deficit.

(From Reinsurance)

The European life sector is facing a EUR100bn capital shortfall, according to a report from strategy consultants Mercer Oliver Wyman.

The report - Life at the end of the tunnel? The capital crisis in the European life sector - looks at the impact that new solvency rules and international financial reporting standards will have on the sector. It claims that the adoption of economic capital techniques for measuring capital under Solvency II would reveal the existence of the deficit.

According to the report, capital requirements under economic capital measures are three times higher than current regulatory minimum capital requirements, which is disguising the shortfall.

Countries that will feel the deficit most strongly include the UK, Germany, Switzerland and Sweden. Each country contains a number of what the report describes as "extremely weakly capitalised companies", leading to a high degree of polarisation between capital-rich and capital-poor companies.

For example, in the UK the report claims that the entire capital shortfall is accounted for by 50% of the sector, with an effective capital strength of 'BB' or worse. A further 20% are adequately capitalised to a 'BBB' level, while only the remaining 30% are well capitalised to 'A' rank and above.

According to the report the capital markets are unlikely to have the capacity to absorb the size of the capital injections required to deal with the deficit, forcing companies to reduce the risk profile of their portfolios either by reducing their investment in equities, or by changing the design of their products to ones with either lower guarantees or guarantees that are structured differently.