Moody's: Solvency II not expected to lead to many insurance rating changes, but uncertainties remain

The impact of the new regulatory system for insurers in the European Union and the European Economic Area, Solvency II, is not expected to be material enough to lead to many rating changes. However, there still remain uncertainties around the calculation of capital requirements, says Moody's Investors Service in a report published today.

"We expect the impact of Solvency II on our rated insurance universe to be modest. Solvency II has been a catalyst for improvement in risk management for the insurance industry, but uncertainties remain around the calculation of capital requirements, and how consistently the regime will be implemented across countries. We expect to receive more clarity on this over the course of 2015," says Dominic Simpson, a senior credit officer at Moody's.

Generally, the rating agency expects lower, albeit more relevant risk-based solvency ratios on aggregate. However, the consistent implementation of Solvency II across countries is a key challenge, according to Moody's.

Different regulatory solvency levels do not change insurance companies' economic reality, but companies' and investors' responses to the new regime may vary, says Moody's. For instance, a higher volatility of the capital ratios may reduce investors' appetite to provide capital; conversely, insurers will strive to reduce underlying economic risks which will be credit positive.

In addition, smaller, less sophisticated insurers are more vulnerable to the introduction of Solvency II, in Moody's view. According to the latest European Insurance and Occupational Pensions Authority (EIOPA) stress test, 14% of the insurers which took part in the survey had a solvency capital requirement ratio below 100% even before any stress test was applied. Although this may appear a large percentage, these companies represented only 3% of total assets.