If the proposals by the European Insurance and Occupational Pensions Authority (EIOPA) are accepted, the Solvency II 2020 Review could undermine insurers' solvency ratio.

The London-based agency S&P Global Ratings initially welcomed the EIOPA’s proposals because they offer a more economic reflection of the interest rate market, and would enhance transparency.

Then there are the disadvantages. The rating agency predicts that the proposals will have a negative impact on insurers’ solvency ratio established under the international framework Solvency II, particularly for firms offering long-term guarantees.

Europe ground zero

A European initiative launched in 2016, Solvency II is being carefully watched by countries on other continents. In Canada, for example, regulators are taking cues from its principles.

Insurers in Europe are on tenterhooks as this review looms, S&P says. The agency expects the impact to vary by country, potentially ranging from 30 to 70 percentage points, and even exceeding 100 percentage points for some insurers. “We believe that in particular, Solvency II ratios of life insurers with long-term guaranteed liabilities, such as those in Germany and the Netherlands, will be affected most,” it predicts.

For now, S&P Global Ratings underlines that the ratings it issues to insurers in Europe will not be directly affected. This is because the agency is continuing to assess capital adequacy using its own risk-based model, “although we do not rule out second-order effects,” it adds.

Rates amplifying the problem

S&P Global Ratings suggests that insurers should update their capital management plans to take into account the effects of the Solvency II review on regulatory ratios.

The impact of the review will be exacerbated by weak interest rates, which continued to slide in 2019, the agency says. Yet S&P adds that some proposals will benefit the industry, particularly the adjustment of catastrophe and property risk charges. 

Long road ahead

Creating a harmonized solvency framework across Europe is a long and arduous process, S&P Global Ratings continues. “EIOPA will make its recommendations to the EC, which, along with national parliaments, will have the final say.”