Reforms to global capital regulation for insurers will likely lead to more market-sensitive solvency ratios, notes Moody’s Investors Service in a new report.
The rating agency says that, although the new regime, known as Solvency II, has yet to be finalized, it expects 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.”
Moody’s notes that the move to Solvency II will not change insurers’ economic reality, but, it says, that the introduction of new solvency ratios may influence the behaviour of investors, insurers and regulators. The magnitude of the credit implications will depend on the final details of the new regime, which will influence those reactions, it says.
“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,” it cautions.
Ultimately, Moody’s expects that regulators will permit relatively generous discounting of liabilities because it believes that they recognize that firms could otherwise face a much higher capital burden, particularly those that provide guaranteed products in the prevailing low interest-rate environment.