Possible reforms in prudential regulation for insurance companies won’t directly affect firms’ credit ratings, but individual company responses to those changes could, says Moody’s Investors Service in a new report.
Efforts to improve solvency regimes for global insurers are supportive of the interests of insurance company creditors, the rating agency says. It notes that reforms aim to address risks that are missing under the current rules, encourage insurers’ to improve risk management, and to improve disclosure of certain financial data.
But, it notes that there are also challenges to realizing these benefits, which are becoming more apparent. “These regulatory and solvency overhauls bring with them increased exposure to model risk and complexity, as firms are increasingly allowed to employ customized/internal models to determine regulatory capital needs,” said Wallace Enman, a Moody’s vice president and senior credit officer.
“With memories of the recent financial crisis still fresh, some have argued that increasingly complex capital adequacy frameworks may just increase costs and reduce transparency while only marginally reducing the risk of insolvency or financial contagion,” added Enman.
Additionally, it says that actions taken by firms in response to new regulation, such as de-risking certain guaranteed products, or returning modeled excess capital to shareholders, would have credit implications.