Moody's says volatility of Solvency II ratios could have broad implications for European insurers

22 May 2013

Moody's Investor Service has outlined its expectation that solvency ratios will ultimately exhibit a more complex volatility under Solvency II than under Solvency I, as both the available capital and the capital requirements of the solvency ratio will change with market conditions.

While Moody's acknowledges that the move to Solvency II will not change insurers' economic reality, the introduction of new solvency ratios may influence the behaviour of investors, insurers and regulators.

The aim of the new regulation is implicitly to influence market behaviour in ways that are favourable to creditors, but there is nevertheless some risk of the opposite occurring. The report explores some potential unintended consequences of the new regulation from the perspective of investors, insurers and regulators, and discusses Moody's interpretation of the new solvency ratios in its analysis of insurers' capital adequacy.

The magnitude of the credit implications will depend on the final calibrations of Solvency II, which will influence how issuers, investors and regulators themselves react. In particular, as part of the preparations for Solvency II, the European Insurance and Occupational Pensions Authority (EIOPA) has launched the Long-Term Guarantee Assessment (LTGA), an impact study that is testing different ways of discounting the liabilities of insurers.

In a separate report, entitled "European Insurers: Solvency II LTGA Study Assesses Impact of Different Liability Discount Rates", Moody's has described what it views as the two extremities that define the range of possible outcomes post the study which are opposite in terms of implied capital requirements. At one end, a high discount rate would lead to lower capital requirements, while a low discount rate would require more capital.

Moody's expects that the eventual outcome post the study will be to permit relatively generous discounting of liabilities. This is because law-makers recognise the capital burden that a more punitive version of Solvency II would place on insurers which provide guaranteed products, particularly within an extreme low interest-rate environment. Such an outcome would not lead to negative rating pressure for most Moody's-rated insurance groups who the rating agency expects will remain relatively well-capitalised on an economic basis in this scenario.

Full press release

Report "European Insurers: Solvency II - Volatility of Regulatory Ratios Could Have Broad Implications For European Insurers" (subscription required)

Report "European Insurers: Solvency II LTGA Study Assesses Impact of Different Liability Discount Rates" (subscription required)

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