Fitch Provides Solvency II Primer for U.S. Analysts

NU Online News Service, Dec. 13, 10:49 a.m. EST

Fitch Ratings does not believe the introduction of a new regulatory regime such as Solvency II should change an insurer’s creditworthiness, but its effects on the competition, capital and management behavior could result in credit implications.

In a special report meant to prime U.S. analysts, Fitch outlines the new regulatory framework for insurance companies operating in 30 countries.

Fitch says “any ratings changes from Solvency II will likely be driven by the characteristics of each insurer and its management of the transition to the new regulatory regime.”

The European Union’s Solvency II could affect an insurers’ capital requirements. If an insurer cannot recapitalize, it would exhibit poor financial flexibility and thus negative credit implications.

Solvency II, which looks to ensure financial soundness and protect policyholders, remains in debate and may not be implemented until a “soft launch” in 2013.

Only two countries—Bermuda and Switzerland—have received equivalency with EU mandates.

The U.S. has yet to receive the same equivalency designation is because the EU is looking at a nation’s regulatory environment as a whole. Since the United States is state-based, the EU regulators have not reached “a comfortable level” to approve equivalency, according to two executives with rating agencies A.M. Best Co. and Demotech at a National Association of Mutual Insurance Companies meeting in September.  

Fitch says Solvency II “leapfrogs” than a risk-based capital regime from the National Association of Insrance Commissioners in 1993. Solvency II requires insurers to hold capital against market risk, credit risk and operational risk, as well as insurance risk, says Fitch. Capital, however, is not the only way to mitigate risk.

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