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Insurers must use QE wisely to gird for correction: watchdog

[FRANKFURT] European insurers must use the time gained through the European Central Bank's quantitative easing (QE) to prepare for an inevitable market correction, the EU's insurance watchdog said on Tuesday.

"QE will delay a correction but it is not going to eliminate the emerging correction," said Carlos Montalvo, executive director at the European Insurance and Occupational Pensions Authority (EIOPA).

"It gives you a little bit more time (to prepare); use it wisely," he told a Standard & Poor's insurance conference.

Excess liquidity was leading to a massive underpricing of risk and insurers needed to make sure they were properly assessing and monitoring risks in their investment portfolios, Mr Montalvo said.

The ECB programme to print money to buy eurozone government bonds is to begin in March and is already pushing debt and equity prices to diverge sharply from levels justified by underlying economic trends.

Insurers, who invest heavily in government debt and other safe assets, complain they are unable to earn sufficient returns with interest rates close to zero or even negative.

Insurers are also coming under pressure from politicians who hope the sector can play a larger role in spurring the economy, particularly through infrastructure investments.

Investments in roads, pipelines or wind parks can create the stable, predictable income that insurers need to meet obligations to policy holders over the long term. Big insurers such as Allianz, Axa and Ergo have pumped billions of dollars into them.

But Mr Montalvo said many small insurers did not have the capability to properly assess the risks involved.

"My fear is that the more peer pressure there is to jump in that boat, the less due diligence (insurers will do)," he told Reuters on the sidelines of the conference.

The industry has previously accused EIOPA of being too restrictive in its rules on infrastructure investing by demanding capital safety buffers that the industry says are unreasonably high.

EIOPA is working to develop criteria and options for a high quality category of securitisation that would help companies, including smaller insurers, to understand the underlying risk of infrastructure investments, Mr Montalvo said, adding that he hoped to have proposals ready by September.

"There is a clear role for insurers here and the business model allows for that, but you have to do it right."