16 June 2010
Published in: Corporate strategy, Capital - models, Investment risk, Regulation - supervision
Expect changes to product and investment strategies
The main drivers of ratings are likely to include exposure to risks that require significantly more capital under Solvency II such as equities, low-grade corporate bonds, products with high guarantees, and marine, aviation and transport insurance, Fitch Ratings said today.
However, "provided the final requirements of Solvency II are similar to those set out in the current draft of quantitative impact study 5 (QIS5), Fitch does not expect a substantial movement in the average rating across its portfolio of insurers as a whole," the report says.
Fitch said earlier this month that it expects Solvency II to have rating implications for some insurers [IERM, Capital/models, 2 June 2010, ‘"Solvency II will have rating implications"'] and in a report released today, Solvency II - Far-Reaching Implications of New Insurance Regulation, the rating agency goes into more detail.
Clara Hughes, associate director in Fitch's insurance team, commented: "Fitch expects Solvency II to reshape the insurance landscape with some fundamental shifts to lower-risk product mix, more cautious investment strategy and, for certain products, higher premiums," Furthermore, changes in their investment strategies could significantly shift demand between these asset classes, with implications for asset prices and yields.
For product lines with increased capital requirements under Solvency II, the company expects insurers to pass the associated extra costs on to policyholders wherever possible. In the UK annuity market, for example, annuity rates are already being cut in direct response to Solvency II.
"People retiring are facing lower annuity rates than five years ago," says Hughes. "This has been due to increasing longevity and diminishing returns but now it is being exacerbated by Solvency II. Many insurers are preparing for the new regulation by moving to much more cautious asset strategies driven by the new rules. However, this means lower expected returns and therefore lower pensions for pensioners."