Best’s News & Research Service - November 04, 2014 11:30 AM (EST)
A.M. Best Special Report: Solvency II Progresses, but Significant Challenges In Store for Insurers
- November 04, 2014 11:30 AM (EST)
Oldwick //BestWire// - A.M. Best has released a new Best's Special Report exploring key issues raised by Solvency II, the European Union-wide insurance regulatory regime.
The report, titled "Solvency II Progresses, but Significant Challenges In Store for Insurers," states that A.M. Best does not expect the new regime, scheduled to come into force 1 January 2016, to have an automatic effect on the ratings of a European insurer, as regulatory solvency calculations do not directly affect underlying solvency. However, regulatory solvency is an important part of the commercial environment that may affect competitive positions over time, and so A.M. Best expects managements' reactions to be calibrated with reference to their effect on ratings.
Most stakeholders initially welcomed the Solvency II project, but enthusiasm for an insurance regulatory framework that would be risk-based, promote an efficient market and harmonise regulation across territories has developed into a more mixed reaction.
Issues the report covers include a likely range of changes to insurers' investment portfolios, a possible expansion of disclosure and challenges related to the use of internal models. The treatment of spread risk and default cost has been among the most contentious aspects of the development of Solvency II and reflects a debate between alternative approaches that produce significantly different results. One approach focuses on the hold-to-maturity business model of insurers and is influenced by values at the time when assets and liabilities are to be realised, whilst the second approach focuses more exclusively on estimates of market values at the reporting date.
"Current proposals involve limited adjustments to the second approach, which will arguably result in an idiosyncratic set of outcomes for the value attributed to longer term liabilities, as well as capital requirements in respect of bond asset risk under Solvency II," said Anthony Silverman, a senior financial analyst and author of the report.
Solvency II is broadly a market value-based regime. It uses a 1:200 confidence level, and insurers can choose to use either a standard formula prescribed by the European Union or an internal model, which requires approval by the insurer's regulator, for calculating required capital. An extended transition phase is currently envisaged.
For a full copy of this special report, please visit: http://www3.ambest.com/bestweek/purchase.asp?record_code=230261 .
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