Fitch: Solvency II impact “not as bad” as expected

Fitch has maintained its view that Solvency II will be broadly ratings-neutral across its portfolio of rated European insurers and reinsurers.

However, it has stated some companies will benefit, while others lose out.

On 14 March, the European Insurance and Occupational Pensions Authority published the results of the fifth Quantitative Impact Study which clarifies the impact of Solvency II on insurers' capital positions.

Solvency II will come into effect on 1 January 2013.

David Prowse, senior director in Fitch's Insurance team, said: "Although QIS5 shows the European insurance sector as a whole has solid capital levels, some non-life insurers may have to recapitalise or reshape their business to survive unless the Solvency II risk charges for non-life underwriting and catastrophe risk are recalibrated.

"However, EIOPA is doing additional work to improve the calibrations and it seems that Solvency II will ultimately be more favourable for non-life insurers than the current draft rules."

The results show that in total, these companies hold €395bn of capital in excess of their solvency capital requirements and €676bn above their minimum capital requirements.

This equates to a €86bn reduction in surplus capital for insurance groups relative to the existing Solvency I regime.

However, QIS5 showed that this effect will largely be absorbed if insurers apply internal models and transitional measures to calculate their capital requirements under Solvency II.

The European Commission's Omnibus II Directive, published earlier this year, signalled a lengthy transition to smooth the changeover from Solvency I to Solvency II.

At end-2009, European insurers had just 18% of assets in equities compared to 23% at end-2007. This de-risking has helped to cushion insurers from the impact of high equity charges under QIS5, Fitch added.

While the impact of restructuring is harder to measure, several insurance groups have moved to branch structures, which are treated favourably under Solvency II.

Other restructuring will also have a large impact, especially at a solo entity level.

The QIS5 results for the UK illustrate the potential benefit of restructuring, Fitch said.

Clara Hughes, director in Fitch's Insurance team, said: "This is largely due to a small number of intra-group arrangements such as loans and reinsurance. These attracted very high capital charges under QIS5. However, the arrangements are unlikely to remain in place under Solvency II, in which case there would be an aggregate surplus of EUR34.5bn, a more accurate presentation of the UK industry's likely position under Solvency II.

“This also highlights the unpredictability of Solvency II results - a small amount of restructuring that the market may not widely foresee can create billions of euros of extra surplus capital."

The firm added that small niche insurers typically face more of a threat from Solvency II as they tend to have fewer levers available to boost their capital positions.