* Insurers have made progress adjusting to Solvency II
* Still urgent need for change at some life insurers
* No surprises in insurer capital positions
* Dividend policies a concern mainly at stressed insurers
By Jonathan Gould and Huw Jones
FRANKFURT/LONDON, May 23 (Reuters) - Insurers are makingprogress in adjusting their business models to account for lowinterest rates and the complex new risk-capital regime calledSolvency II that took effect at the start of the year, the EU'stop insurance regulator said.
Insurers have also been diversifying their investmentportfolios to obtain greater returns, while avoiding an alarmingincrease in the degree of risk, Gabriel Bernardino, chairman ofthe European Insurance and Occupational Pensions Authority(EIOPA), told Reuters in an interview.
"We see an evolution; changing business models is more andmore a part of discussions in the boards of companies,"Bernardino said, adding that dividend policies were a concern atsome insurers where these models were under stress.
The Solvency II rules, which came into force on Jan. 1,require insurers to overhaul the way they assess risks on theirbooks and measure the capital required to cover obligations topolicy holders often decades in the future.
They are also forcing a revamp of life insurance products inmany countries where policies included high guaranteed interestrates to customers. More changes are needed, Bernardino said.
"There is urgency, especially for pockets of life insurancebusinesses based on hard guarantees," he said.
"I'm more confident this year than last on the pace ofchange but does that mean everybody is already there? No."
BIG SHIFTS
European insurers were moving at different speeds and themarket will see big shifts in the coming five years, he said.
"We need to see more simple, more standardized products, andvalue for money for consumers," he said.
EIOPA is carefully monitoring the implementation of SolvencyII in face of low interest rates, but there have been nosurprises on insurers' capital positions, he said.
Investor worries about insurers possibly needing to raisecapital to meet Solvency II requirements hit stocks of someDutch companies last year, prompting Delta Lloyd into a650 million euro ($728 million) rights issue in March.
Insurer Aegon on Monday said it was selling 3billion pounds ($4.4 billion) of annuity liabilities toBritain's Legal & General Group, a move analysts saidwas probably driven by Aegon's desire to improve its solvencyratio.
Bernardino said analysts and investors must understand thatthere is no "magic number" for the regulatory Solvency CapitalRequirement (SCR), which varies depending on the risksensitivity of an insurer's business model to interest rates,insurance or credit risks.
"The ones with more sensitivity will need to have moreleeway on capital if they don't want to be close to the SCR," hesaid.
"You can't say that just because some companies have thesame number, they have the same level of risk," he added.
NEGATIVE RATES
Some big insurers such as Allianz have reportedSolvency II ratios at 200 percent or more of the SCR,underpinning expectations for big dividends or share buybacks.
Bernardino said dividend policies were a concern mainly forinsurers with stressed business models that needed to buildresilience against volatile market conditions.
"Overall, what I've seen on dividends and share buybacks,well, that is normal capital management; it is not forsupervisors to get involved with those elements, provided thatcompanies have a robust solvency position," Bernardino said.
Negative interest rates are exacerbating investmentheadaches for insurers, who in turn were now searching forassets with better returns than long-dated bonds, but this hasnot led to a dramatic increase in risk in investment portfolios.
"We don't see herd behaviour. I welcome more diversificationin investment portfolios. Diversification is something thatalways pays off at the end of the day," Bernardino said.($1 = 0.8933 euros)
(Additional reporting by Carolyn Cohn in London; Editing byKeith Weir)
Legal & General (LGEN)