Fitch: Solvency II metrics incomparable - FREE

Fitch: Solvency II metrics incomparable - FREE

Solvency II coverSolvency II metrics are not comparable between insurers because they are taking different approaches to calculations, so cannot be a direct driver of ratings, Fitch Ratings has said.

Inconsistencies are arising because many insurers are applying different transitional measures, which will strongly affect their metrics.

“Some are also using internal models rather than the standard formula and we believe some regulators are taking a tougher stance than others in how they interpret and apply Solvency II,” said the rating agency.

Fitch said it will continue to assess insurers' capital primarily using its own Prism Factor-Based Capital Model, as it argues that Prism scores are more comparable than Solvency II metrics.

“We view Solvency II disclosures as supplementary information, which we will evaluate particularly for insurers with unexpectedly weak or sensitive Solvency II metrics,” Fitch added.

Widespread use of transitional measures to phase in the effects of Solvency II over several years are expected to distort comparisons between insurers as they boost Solvency II metrics to varying degrees, often significantly, the rating agency believes.

Many insurers also calculate their Solvency II positions using internal models based on their own risk calibrations.

These models are complicated and lack public visibility, and differ from each other and from the standard formula, often resulting in lower capital requirements.

There are some large uneconomic influences on Solvency II ratios as well. For example, the 4.2% ultimate forward rate (UFR), which is used to extrapolate the forward curve for valuing very long-term liabilities.

Although there is rationale for this figure, it looks high compared to current long-term yields, potentially leading to an overstatement of the economic capital position, Fitch argued.

For this reason, the Dutch regulator has said that insurers should take into account the effect of the UFR on their capital levels when setting dividends.

“Regulators are planning to review Solvency II in 2018, so there may be important changes still to come,” said Fitch.

“In the meantime, many insurers will refine their existing internal models or prepare new models for regulatory approval in 2016.

“Solvency II metrics are therefore subject to potentially significant restatements, reflecting methodology/modelling changes rather than genuine changes in risk profile, at least until the new regime has bedded in,” the rating agency added.

For an in-depth special report of features timed for January's introduction of Solvency II, read the latest issue of Reactions.

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