S&P Report Examines Solvency II Impact on Europe’s Insurers

March 13, 2008

Standard & Poor’s Ratings Services new report -“One In Four Of Europe’s Insurers Could Face Major Strategic Decisions Under Solvency II” – concludes that the regulations, which are scheduled to come into force in 2012, “will have a profound impact on Europe’s insurance industry and will accelerate consolidation in Europe.”

S&P noted that “based on the results from the third quantitative impact study (QIS 3), it believes that Solvency II may result in more than 25 percent of Europe’s 5,000 insurers being faced with major strategic decisions.”

S&P credit analyst Rob Jones stated: “We think that large insurance groups will benefit substantially from the changes made under the proposed Solvency II directive, while niche providers will suffer from the emphasis on diversification.”

S&P’s report also examines the “other significant implications to the changes resulting from Solvency II,” including “the treatment of hybrid capital, the global supervisory implications, and the impact on ratings.”

Concerning hybrid capital, S&P said the proposed regulations generate uncertainty. “The current draft of QIS 4 indicates that references to the earliest call option dates in hybrid instruments are to the remaining period at the reporting date, rather than at the issue date,” Jones explained. “We doubt that it was intended that a Tier 1 issue with a call option at 10 years with a 100 basis point step-up would be relegated to Tier 3 one day after issue.”

The report also highlights that Solvency II “is not being developed in a vacuum and is part of global regulatory change. While it will harmonize practices within the EU, the supervisory practices of non-EU countries will also be a factor.”

Jones pointed out that “in the absence of supervisory equivalence, non-EU insurers may find themselves operating at a competitive disadvantage in Europe. They may need to limit the damage by setting up intermediate EU holding companies for their EU operations.”

S&P also said that its own “rating process will be impacted by Solvency II.” While the overall approach to ratings is unlikely to change, S&P listed the following issues it will have to deal with:
— Analysts will need to make assessments on the impact of the changing competitive landscape on individual insurers well in advance of the implementation of Solvency II.
— Many insurers will find supervisory capital adequacy to be a more relevant constraint under Solvency II than they currently do, particularly the less diversified insurers. If so, Standard & Poor’s capital adequacy model results may have less impact on the rating.
— The impact of group support arrangements in assessing the group status of rated subsidiaries will be under consideration.

The report also comments on some of the most controversial features of Solvency II including group supervision, the minimum capital requirement, and proportionality.

The report is available to subscribers of RatingsDirect, the real-time Web-based source for Standard & Poor’s credit ratings, research, and risk analysis, at www.ratingsdirect.com. If you are not a RatingsDirect subscriber, you may purchase a copy of the report by calling (1) 212-438-9823 or sending an e-mail to research_request@standardandpoors.com.

Ratings information can also be found on Standard & Poor’s public Web site at www.standardandpoors.com; select Ratings in the left navigation bar, then Credit Ratings Search. Alternatively, call one of the following Standard & Poor’s numbers: Client Support Europe (44) 20-7176-7176; London Press Office Hotline (44) 20-7176-3605; Paris (33) 1-4420-6708; Frankfurt (49) 69-33-999-225; Stockholm (46) 8-440-5914; or Moscow (7) 495-783-4017.

Source: Standard & Poor’s

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