Credit rating agency AM Best has released a report on Solvency II that concludes it will not have an automatic effect on the ratings of European insurers.

 

AM Best did point out, however, that regulatory solvency is an important part of the commercial environment and may affect competitive positions over time. "AM Best expects managements' reactions to be calibrated with reference to their effect on ratings," stated the agency.

 

The credit rating agency said that, at first, most stakeholders welcomed the Solvency II project because they thought it would make it easier to compare and measure the performance of insurers and force them to manage their capital in a more sophisticated way.

 

But, as the credit rating agency pointed out, the level of enthusiasm for a risk-based insurance regulatory framework that would promote an efficient market and harmonise regulation across territories is now 'more mixed'.

 

AM Best cites a likely range of changes to insurers' investment portfolios and a possible expansion of disclosure and challenges related to the use of internal models as key reasons.

 

"The treatment of spread risk and default cost has been among the most contentious aspects of the development of Solvency II and reflects a debate between alternative approaches that produce significantly different results," stated the credit rating agency.

 

AM Best explained that one approach focuses on the hold-to-maturity business model of insurers and is influenced by values at the time when assets and liabilities are to be realised. The second approach focuses more exclusively on estimates of market values at the reporting date.

 

"Current proposals involve limited adjustments to the second approach, which will arguably result in an idiosyncratic set of outcomes for the value attributed to longer-term liabilities, as well as capital requirements in respect of bond asset risk under Solvency II," said Anthony Silverman, a senior financial analyst and author of the report.

 

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