Insurers are still grappling with Solvency II, warns Fitch

Almost six months after the introduction of Solvency II, the insurance market is still coming to terms with the changes that Solvency II has – and will – bring in, according to Fitch Ratings.

Speaking at the Fitch insurance capital management event at its London offices, David Prowse, senior director at Fitch Ratings, pointed out that although there had been quite a bit of criticism about the new regime, Solvency II was undoubtedly a better system than Solvency I.

However, he stressed that comparing companies via their solvency ratios was rarely like comparing apples with apples, illustrating the point by producing a pair of actual apples from his pockets.

“As we warned in January, when it comes to Solvency II you have to handle the metrics with care,” he told the audience at the event. “Especially when it comes to transitional measures.”

Prowse pointed out that a number of companies had used transitional measures on technical provisions in order to phase in the transfer from Solvency I to Solvency II, and that for some of these companies these measures will last for a number of years. As a result this might distort some comparisons.

Prowse also stressed that the issue of equivalence was effectively polluting Solvency II metrics with non-Solvency II capital. The US for example is currently being treated as equivalent but is not yet fully so, although this will change over time and allow the US and Europe to eventually match up.

Prowse concluded his presentation by pointing out that 2017 will see the real test for Solvency II as it goes through innovation and evolution as insurers optimise their models, their balance sheets and their capital.

Ongoing reviews of Solvency II might make changes possible, especially as full public disclosure, including ‘fully loaded’ Solvency II, will come in for the first quarter of 2017.