FRANKFURT (Reuters) - Euro area insurance companies may face "significant" balance sheet stress ahead due to financial market turbulence and a weak economy, the European Central Bank warned.

"The slowdown in economic activity is weighing on the underwriting performance of euro area insurers and stresses in financial markets continue to pose challenges for the stability of insurers' investment income," the ECB said in its twice-yearly Financial Stability Review.

While insurance companies on average still had sufficient capital to absorb shocks in the first quarter of 2009, the ECB listed a number of potential threats, including investment and economic risks, contagion from banking activities and strong competition in some business segments.

"Insurers are currently facing considerable risks that could, should they materialise, quickly reduce solvency positions significantly," the central bank said.

The ECB recommended that insurers reduce large investment exposures through hedging and think again about continuing with share buyback programmes and dividend payouts.

"Insurers and insurance supervisors need to be vigilant in handling the risks facing the insurance sector and should take appropriate action to manage them," the ECB said.

"A greater transparency of investment exposures and the accounting methods used is also needed and should be promoted by insurance supervisors," it added.

EU insurance supervisors said last month that the region's insurers are stable but nevertheless plan to conduct stress tests of the 30 biggest insurers next year to gauge their ability to withstand the financial crisis.