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German regulator warns of Japan-style risks to insurers

The president of German financial regulator, BaFin, said on Wednesday he saw no medium-term risks to insurers but warned of the longer term issues faced as a result of an ultra-low interest rate environment.

Felix Hufeld, President of the Federal Financial Supervisory Authority in the euro zone's largest economy said "Japanese conditions", where life insurers suffered under harsh deflation, posed a real challenge to the long-term health of the industry.

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"In the short to medium term no, we don't think there is any (bankruptcy) risk like that. Resiliency within the industry is strong, but obviously if we were to move into what's commonly called Japanese conditions - it is a challenge," he said, talking about the risks to bankruptucy among insurers in Germany.

"Which means, if it is really a long term challenge the industry has got to change and we will see changes which we would have to cope with from a supervisory point of view," he told CNBC, speaking from the sidelines of a conference in Frankfurt hosted by Handelsblatt.

Hufeld took up his post as BaFin President in March and was armed with the task of re-shaping the financial watchdog, which now works closely with the European Central Bank (ECB). He said the insurance industry has had to learn how to cope with the central bank's new quantitative easing program.

Inflation in the 19-country euro zone is currently at 0.2 percent year-on-year and concerns about deflationary risks prompted the ECB to start buying 60 billion euros worth of assets a month earlier this year.

Yoshikazu Tsuno | AFP | Getty Images

Japan continues its fight to boost prices in an economy that has long batted deflation - a cycle of falling prices and wages. Japan, the world's third largest economy, struggled with deflation in the 1990s, during which time the country saw a number of large insurers go bust.

Deflation is hard on insurers because it tends to depress long-term investment returns, particularly from government bonds. Low rates made it hard for insurers to earn decent returns from their bond portfolios to cover promised payouts to policy holders.

"We don't judge upon monetary policy at all. But if you ask me do they impact the ability of the insurance industry to act appropriately? The answer is yes, they do. Is monetary policy as such appropriate, that is upon the central bankers to judge. We have to cope with the markets as they are," Hufeld told CNBC.

Speaking on the future of BaFin and its size, he said that current complexities in regulation required the group to maintain its scale for now.

"The EU (European Union) in general is a very complex animal and it will stay that way, so if we want to do our job and we are one of the most relevant authorities in the game, there can't be a significant shrinkage. If you are talking medium to longer term 5-10 years from now, that may be a different ball game, which is very difficult to predict today," he added.

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