The rating agency points out the possible negative effects deriving from the possible reduction in capital requirements proposed by the EU Commission
The reduction of Solvency II capital requirements proposed by the European Commission could encourage higher investment risk and underestimate the spread risk of life insurers. This is what an analysis of Fitch Ratingswhich in any case reminds us that the delegated regulation remains subject to negotiation between EU regulatory bodies and that, furthermore, “it is likely to increase the sensitivity of insurers to equity and credit risk”.
The Commission, recalls Fitch, “aims to free capital for the economy, support the green and digital transitions, as well as the SME sector, and improve the international competitiveness of insurers, while maintaining the protection of policyholders”. The rating agency estimates that the net benefit of the proposed changes averages 5%-7% of insurers’ solvency capital. “We expect – we read in the analysis – that life insurance companies will record a greater increase than non-life insurance companies.
We believe that life insurance companies redeploy some of the released capital over time to increase investment risk and remain competitive, while non-life insurance companies are less likely to do so.”
Revisions to long-term guarantee provisions would reduce capital requirements, particularly for life insurance companies with significant outstanding savings. This would occur primarily through changes to the risk margin calculation, including a lower cost of capital and the introduction of the “decay factor”, a parameter that modifies the risk margin calculation by applying a tapering effect on future capital requirements. The rating agency judges the effects of the changes to the volatility adjustment and the extrapolation of the risk-free curve as neutral.
Calibration aims to reduce solvency volatility in periods of short-term stress in financial markets, but may underestimate spread risk in favorable markets, potentially incentivizing a shift towards riskier or less liquid credit investments.
“We expect – writes Fitch – that more solid insurance companies will mitigate this phenomenon by strengthening the matching between assets and liabilities, maintaining a prudent distribution of profits and preserving buffers. Companies with reduced capital or inadequate management of assets and liabilities could experience greater pressure on their credit profiles in times of stress.
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