Claims, bond yields pose rising insurance risk-ECB

* Sees risk recent catastrophe losses higher than expected

* Sees risk a rapid rise in bond yields may hit investments

* ECB backs insurers boosting commercial property lending

* Exposure to lower-rated sovereign bonds manageable

FRANKFURT, June 15 (Reuters) - Higher than expected damage claims from Japan's earthquake and a possible sharp rise in long-bond yields pose an increased risk to euro-area insurers, the European Central Bank said.

"There is a risk that insured losses caused by the Japanese earthquake and other recent natural catastrophes will be higher than currently estimated and will leave the insurance sector with a smaller capital buffer in (the) case of further unexpected events," the ECB said on Wednesday.

A further big hit during the year could materially hurt the solvency of euro-area insurers, particularly if the Atlantic hurricane season lives up to forecasts, the ECB said in its twice-yearly review of financial stability in the euro area.

"Although they are expected to be able to withstand the losses, some might need to bolster their capital positions, in particular if further severe catastrophic events were to occur during the remainder of 2011," the central bank added.

The March 11 earthquake and tsunami in Japan may have caused nearly $40 billion in insured losses. Reinsurers like Munich Re (MUVGn.DE), Hannover Re (HNRGn.DE) and Scor have given preliminary loss estimates but say uncertainty about the final toll remains high.

The threat from damage claims and surging long-term bond yields were the two areas of risk identified as having increased since the ECB's last stability review in December.

"The stability of insurers' investment income could be challenged if long-term bond yields were to rise rapidly as it would lead to marked-to-market losses on insurers' fixed income investments," the central bank said.

Although it did not go into detail on the debt crisis facing euro zone periphery countries likeGreece and Ireland, the ECB played down the risk to insurance companies from investments in lower-grade government bonds as "manageable".

"Insurers' exposures to fixed income securities of fiscally distressed countries appear to be fairly limited," it said.

The risk of contagion through links to the euro area banking system was largely unchanged, the ECB said, adding that the bloc's insurers and pension funds held about 587 billion euros ($844 billion) worth of banks' debt securities at the end of 2010, up by 2 billion euros from the second quarter.

Insurers' financial performance was broadly stable in the first three months of this year, while reinsurers also benefited from rising premiums, despite the blow from the damage claims and falling reinsurance prices at the start of the year.

The ECB also gave its backing to efforts by insurers such as Allianz and Axa -- Europe's top two players -- to step up lending for commercial property investments.

Insurers could capture higher returns than in fixed income securities while also matching their long-term liabilities, the ECB said, adding that Europe lagged well behind the United States, where insurers accounted for 20 percent of the commercial debt property market.

"Increased lending by euro area insurers can generally be seen as a positive development from a financial stability perspective," the ECB said, adding that the lending was expected to be treated favourably under new insurance risk-capital rules, known as Solvency II, due to come into force in 2013. ($1=.6957 euros) (Reporting by Jonathan Gould; Editing by Greg Mahlich)