Moody's: Insurers will preserve capital as Solvency II looms

Insurers will remain cautious in managing their capital this year because of recent pressure on Solvency II ratios, says Moody's Investors Service. The rating agency expects that the Solvency II ratios that insurers are scheduled to report in January 2016 will be lower than 2014's economic capital ratios as a result of historically low interest rate levels and possible regulatory requests to adjust internal models.

"Regulators will likely request changes to calibrations, or impose capital add-ons, before approving insurers' internal models for Solvency II use. Combined with the decrease in interest rates, this will likely drive Solvency II ratios below current economic capital ratios," says Benjamin Serra, a Moody's Vice President -- Senior Credit Officer and co-author of the report.

Moody's has observed multiple modelling inconsistencies among European insurers, mainly regarding assumptions on US equivalence, capital fungibility and capital charges for sovereign debt. Furthermore, for some insurers, when the capital ratios are computed with their internal model, the resulting ratios are higher than those derived by using the standard formula.

Pressures on regulatory solvency ratios have led some insurers to increase their capital, or announce their intention to strengthen their capital. Insurance groups with the highest interest rate risk exposure will experience higher pressure on their Solvency II ratios. This applies to some life insurers in Germany, the Netherlands or Norway.

The majority of Moody's-rated insurers hold capital buffers well in excess of Solvency II requirements. However, uncertainties about the actual ratios that insurers will be able to report once the Solvency II regime comes into force next January will likely lead companies to preserve capital by retaining earnings or limiting investment risk, which Moody's considers to be credit positive.

Although low interest rates are affecting insurers' investment returns and profits, Moody's considers that insurers will not be in a position to substantially modify their asset allocation in 2015 and increase asset risk to boost investment yields. The Solvency II regime requires insurers to hold risk-sensitive capital charges for any assets that they hold. Therefore, an increase in asset risk would further lower regulatory solvency ratios.