A proposed new set of solvency standards for European insurers should not result in any widespread re-rating or new capital requirements, said a report published today by Moody's.

The Solvency II framework for insurers being developed at the initiative of the European Commission is not, in Moody's view, aimed at strengthening the industry's capital base. But rather, it is "more to ensure that sufficient regulatory and internal risk management controls are in place to enable management and regulators to more fully understand and control the dynamics of the industry's risk profile."

Moody's said it sees the new framework's primary focus as developing new technical rules for valuation of assets, liabilities and required solvency margins. An advanced supervisory process with more public and private disclosures is also part of the program.

The Solvency II framework has evolved along with other such regimes in the world. For example, in the 1990s the Risk-Based Capital systems for both life and property-casualty businesses were set in place in the United States.

Valuation of assets and liabilities under Solvency II should match what a willing buyer would pay for a relevant item. "Consequently, liabilities will have to be valued using such methods as to allow reserves to be set at a certain confidence level," the report said.

Moody's said that in many European Union states, the lack of a requirement to calculate liabilities on anything other than a book value basis, and the absence of any sophisticated assessment of embedded guarantee and option costs, have acted as a disincentive to high risk management standards.

The main impact of the standards will fall on life insurers whose policies have often contained fairly complex financial options and guarantees, Moody's said.

The proposal that the insurers' regulatory capital structures come more in line with those of the banking world is viewed as a positive by Moody's, which said it should increase capital financing options for insurers.

"In particular, fixed income investors are already very familiar with the banking regulatory capital system, and creating a similar structure for insurers should help facilitate insurers' continued access to fixed income markets," the report said.

Special Reports /

Moody's Rates European Solvency Rules

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