Insurers to Remain Cautious Ahead of Solvency II, says Moody’s

Insurers will remain cautious in managing their capital this year because of recent pressure on Solvency II ratios, says Moody’s Investors Service.

The credit ratings agency (CRA) has issued a report entitled
‘Pressures on Solvency II Ratios Will Drive Cautious Capital Management’
. In it, Moody’s predicts the Solvency II ratios that insurers are scheduled to report in January 2016 will be lower than 2014’s economic capital ratios as a result of historically low interest rate levels and possible regulatory requests to adjust internal models.

“Regulators will likely request changes to calibrations, or impose capital add-ons, before approving insurers’ internal models for Solvency II use,” says Benjamin Serra, a Moody’s vice president – senior credit officer and co-author of the report. “Combined with the decrease in interest rates, this will likely drive Solvency II ratios below current economic capital ratios.”

Moody’s adds that it has observed multiple modelling inconsistencies among European insurers, mainly regarding assumptions on US equivalence, capital fungibility and capital charges for sovereign debt. Furthermore, for some insurers, when the capital ratios are computed with their internal model, the resulting ratios are higher than those derived by using the standard formula.

Pressures on regulatory solvency ratios have led some insurers to increase their capital, or announce their intention to strengthen their capital.

Insurance groups with the highest interest rate risk exposure will experience higher pressure on their Solvency II ratios, the report suggests. This applies to some life insurers in Germany, the Netherlands or Norway.

The majority of Moody’s-rated insurers hold capital buffers well in excess of Solvency II requirements, the CRA reports. However, uncertainties about the actual ratios that insurers will be able to report once the Solvency II regime comes into force next January will likely lead companies to preserve capital by retaining earnings or limiting investment risk, which Moody’s considers to be credit positive.

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