21 June 2018

Commercial Risk Europe: Solvency II ‘a highly rules-based exercise’, says Best

Solvency II has moved the European regulatory regime significantly towards a consistent, rigorous and market value-based system, but along the way it has become a highly rules-based exercise, according to AM Best.

The ratings agency said there are differences in its application between countries and companies. “Some of these are more in the nature of differences in approach by regulators and are hard to state definitively, while others – such as whether a dynamic volatility adjustment is allowed or not – are quite explicit. Nevertheless, regulatory convergence has, in the broader picture, clearly been a feature of Solvency II,” said Best.

It described Solvency II as a patchwork of “textbook” financial mathematics overlaid with adjustments.

“It can be argued that the target of an economic balance sheet and the use of market values has been compromised by items such as transitional measures, the volatility and matching adjustments, an element of arbitrariness in the setting of the ultimate forward rate, and the component of own funds from entities included using the deduction and aggregation method,” said Best. “However, an alternative view would contend that these amounts often move the SII balance sheet to better match transaction values, making it more relevant, and arguably more ‘economic’.”

It said the view of an EU insurer’s solvency provided by Solvency II quantitative reporting “is a reasonably coherent one that is heavily influenced by a focus on market values, although what comprises a good market value remains a subject of debate outside of listed securities”.

Best added that Solvency II data will increase in usefulness when there are multiyear datasets to work with, trends over time begin to appear and the drivers of changes start to emerge.

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