Solvency II won’t be a direct driver of ratings: Fitch

Solvency II metrics are not comparable between insurers due to their different calculation approaches and will therefore not be a direct driver of ratings, according to Fitch Ratings.

The firm said in its new report, Solvency II Metrics - Limited Use in Insurer Ratings,  that inconsistencies arise 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 Fitch said it believes some regulators are taking a tougher stance than others in how they interpret and apply Solvency II.

“We will continue to assess insurers' capital primarily using our Prism Factor-based capital model, as we believe Prism scores are more comparable than Solvency II metrics,” said Fitch.

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

Fitch said widespread use of transitional measures to phase in the effects of Solvency II over several years will distort comparisons between insurers as they boost Solvency II metrics to varying degrees, often significantly.

“Many insurers also calculate their Solvency II positions using internal models based on their own risk calibrations,” added the firm.

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

Fitch also said that there are some significant uneconomic influences on Solvency II ratios, such as the 4.2 percent 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 relative to current long-term yields, potentially leading to an overstatement of the economic capital position,” said the firm.

Regulators are planning to review Solvency II in 2018, so there may be important changes still to come, according to Fitch. It said that 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, said Fitch, reflecting methodology/modelling changes rather than genuine changes in risk profile, at least until the new regime has bedded in.