Solvency II is now needed, says S&P
Standard & Poor's (S&P) says that, though delayed, the proposed European framework for insurance regulation, Solvency II, is still very much needed.
In a report, called ‘Q&A On The Future Of Solvency II: Pragmatism Is Likely To Prevail’, the rating agency said the prospect of a prolonged period of low interest rates in the EU and fragile economies across the region represent negative rating factors for many insurance companies rated by S&P, as revealed at a recent conference about Solvency II in Dublin.
"Uncertain and evolving regulations, like Solvency II, are further undermining investor confidence in the sector," said Rob Jones, credit analyst at Standard & Poor's. "Regulatory uncertainty is also delaying the restructuring of business models and investment decisions."
In S&P’s opinion, companies most exposed to low interest rates and weak economic growth are life companies that provide guaranteed returns to policyholders. Several of these companies have recently been downgraded, had their ratings revised or kept the outlooks on their long-term ratings at negative.
The report also said that existing regulatory regimes have shortcomings and are devoid of incentives for good risk management.
In view of the current monetary and economic context, the European Commission has asked EIOPA (European Insurance and Occupational Pensions Authority), the European body that is developing Solvency II's technical standards, to study the continued availability and affordability of insurance products containing long-term guarantees.
It has also asked EIOPA to study the future investing behaviour of insurers and how this could affect the financing of infrastructure projects, securitisations and small and midsize enterprises, among other things.
"These regulatory topics are deeply intertwined with the prospects for the European economy. For this reason, further significant changes in Solvency II are likely to result, and pragmatism is likely to prevail over principles," said Jones.
