"These regulatory and solvency overhauls bring with them increased exposure to model risk and complexity, as firms are increasingly allowed to employ customised/internal models to determine regulatory capital needs", said Wallace Enman, a Moody's Vice President -- Senior Credit Officer.
"With memories of the recent financial crisis still fresh, some have argued that increasingly complex capital adequacy frameworks may just increase costs and reduce transparency while only marginally reducing the risk of insolvency or financial contagion", added Enman. In addition, actions taken by firms in response to new regulation, such as de-risking certain guaranteed products or returning modelled excess capital to owners would have credit implications, says Moody's.
The special comment examines the likely benefits of Solvency II in Europe, and the Solvency Modernisation Initiative (SMI) in the US. Both regimes are supportive of the interests of insurance company creditors; focusing on addressing missing risks under current rules, encouraging insurers' to improve risk management, and improving disclosure of certain financial data, says Moody's.
But there are challenges to realising these benefits which have become more apparent as the targeted implementation dates have drawn near. Moody's points to the likely delay until January 2016 of Solvency II in Europe even as regional economic stress increases. In the US, the National Association of Insurance Commissioners (NAIC) has made some progress on accreditation standards, and will continue its work on upgrading solvency regulation in 2013.
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