Solvency II to hit insurers' credit ratings
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Rating agency Fitch is predicting that Solvency II will hit insurers’ credit ratings from 2012 and lead to capital-raising, restructuring and consolidation.
It says most insurers’ capital adequacy is unlikely to change materially as a result of the new directive but it expects Solvency II to bring consolidation as well as some insurers being forced to change their product mix and pricing, which will put more pressures on ratings.
It says many European insurers are big, diversified and have the resources and access to capital to meet the new requirements, adding that such companies may see credit rating positives as increased capital is likely to reduce leverage.
But negatives include threats to some lines of business as increased capital requirements may damage commercial viability. It also highlights short-term implementation risk as a concern.
Fitch predicts industrywide effects of Solvency II will include increased use of capital management tools and an acceleration of the shift from capital-intensive to more capital-efficient lines of business.
The main drivers behind this are the increased capital requirements, implementation costs and the change from a non-risk-based capital framework to a more risk-sensitive regime.
It says mergers and acquisitions are likely in more fragmented markets and where access to capital markets is limited as some insurers will be left with few possibilities to raise capital to meet capital rules.
Well capitalised companies and those with more financial flexibility may approach smaller niche players with limited financial resources, it says.
Fitch expects the new regime to prompt companies to re-examine the allocation of capital to different lines of business by reducing volumes of business written, increasing rates and restructuring products to be less capital-intensive.
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