What will the impact be of Solvency II on re/insurer ratings? asks Simone Peakin
Fitch does not expect to adjust the ratings of many insurance companies as a direct result of the new Solvency II regime for the European Union (EU), because many already hold capital in excess of Solvency I regulatory requirements. Larger insurers anticipating the regime have already made changes and it is companies from EU states that only meet the minimum Solvency I requirements which are most likely to be affected (eg France).
Many of the larger insurers are anticipating the Solvency II requirements and have already taken steps to improve their capital and risk management. Local regulations in some EU states also encourage this. Whilst those insurers that have taken these steps are likely to benefit from a head start, there is a risk that those who have not taken any action so far are left unprepared.
For many insurers the new regulations may not have an impact on how much capital is actually held, as they may already be holding additional capital by choice. In some instances, it may even result in a reduction in the amount of capital held, as the modelling process may make them think more explicitly about their risk profile and identify excess capital.
While EU countries meeting minimum Solvency I requirements have the most work to do, countries that have developed their own risk-based capital requirements (eg UK, Netherlands) are already moving in the anticipated direction of Solvency II.
Fitch recognises that Solvency II may identify additional risks and therefore lead to increases in capital held by some insurers. If the agency believes this is in line with the additional risk identified, the rating is likely to remain unchanged. However, if Fitch believes the insurer under- or over-compensates for the additional risk then a rating change would be more likely. Alternatively, insurers may choose to address the additional identified risk in other ways, eg mitigating the risk by reducing the amount of business it writes, using reinsurance or changing asset allocation. If excess capital is identified and the insurer chooses to return this to shareholders, Fitch would consider the merits of the case and act appropriately.