German insurers had expected to use the so-called dynamic transitional, which was designed to ease the transition to Solvency II  for existing long-term business with guarantees in a prolonged low-interest environment.

 

Analysis by consultancy Towers Watson suggests the static method would be more beneficial to German companies, as it would smooth out the surge in value of insurers' liabilities under profit-share agreements when pools of unrealised gains are marked-to-market under Solvency II, which the dynamic method would not.

 

The Omnibus II Directive allows firms to choose between two measures to ease the burden of making a transition to Solvency II's capital requirements over a period of 16 years. These transitional arrangements are critical for the German insurance industry to manage the large back-books of policies with high guarantees.

 

The static measure gives insurers a special allowance to own funds, which is based on the difference between the value of the insurer's technical provisions under each of the two regulatory regimes. The dynamic transitional is a moving adjustment to the discount rate, and is a weighted average of the difference between Solvency I and Solvency II rates.

 

German life insurers have been expected to apply the dynamic method, as they rely on discount rates higher than 3 per cent for some of their long-term liabilities. Solvency II's discount rate, which is based on swap rates, is likely to be lower than that. Towers Watson estimates firms applying the dynamic transitional could increase the discount rate by 30–40 basis points at baseline, reducing the present value of liabilities and increasing the value of own funds. The exact figures depend on the duration of assets and Solvency I average guaranteed rate.

 

This method, however, might not be the most advantageous approach for the German insurance industry. Towers Waton's preliminary comparative analysis of the transitional measures suggests that insurers could have higher levels of own funds if they apply the static method.

 

Full article (Risk.net substcription required)