20 January 2015

Fitch: New international insurance regulations pose no threat to ratings

Fitch believes that the increased focus on international regulation should also lead to further improvements in risk management. Nonetheless, as large European insurers are already well regulated, the benefits of incremental improvements in risk management frameworks could be outweighed by the costs associated with the increasing regulatory burden.

A key concern for insurers is that the new regulations should take account of the differences between insurers and banks. Banks have long-term illiquid assets but short-term liquid liabilities, whereas insurers tend to hold more long-term marketable assets and have long-term stable cash inflows. Also, traditional insurance activities can typically be resolved through run-off or portfolio transfer procedures. As a result, Fitch believes that insurance companies tend to pose less risk to wider financial markets (systemic risk) than banks.

The main area where insurers may pose greater systemic risk is in non-traditional business or their non-insurance activities such as derivatives and products with complex financial options and guarantees. These can change insurers' risk profiles, making them more susceptible to short-term risks. This is an area of particular attention for the International Association of Insurance Supervisors (IAIS) and Fitch believes the work being carried out in respect of Global Systemically Important Insurers (G-SIIs) should mitigate some of this risk.

European insurers are already well advanced with planning and implementation of Solvency II. Additional new capital requirements in the form of Higher Loss Absorbency (HLA) could potentially conflict with those for Solvency II and at this point it is unclear which framework will be more onerous. This inconsistency is likely to be most problematic in times of financial distress, when the different risk models would be most likely to diverge.

The IAIS has developed a highly ambitious timetable in conjunction with the Financial Stability Board (FSB) for the implementation of the new regulations. This may mean that key factors are overlooked or there are unintended consequences. However, Fitch expects delays to the IAIS's implementation timetable, in light of the lengthy delays experienced in the implementation of Solvency II.

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