In a new report aimed at U.S. insurance analysts, Fitch Ratings describes the new Solvency II regulatory regime for European insurers, potential for changes in the industry's profile and possible rating implications. The report also covers Solvency II's approach to recognizing regulatory regimes outside of the European Union. >From a U.S. insurance analyst perspective, Solvency II could affect the attractiveness of U.S. insurance business to European owners, and vice versa. Furthermore, Solvency II could be a harbinger for regulatory changes in the U.S.
Solvency II is an updated regulatory framework for insurance companies that operate in 30 European countries. The regime introduces economic risk-based solvency requirements for the first time across Europe and will replace the simplistic Solvency I measures developed in the 1970s. Solvency II's three pillar approach is more comprehensive than the risk-based capital (RBC) regime introduced by the National Association of Insurance Commissioners (NAIC) in the U.S. in 1993.
Rating changes for European insurers due to Solvency II will likely be driven by an insurer's management of the transition to the new regulatory regime. Fitch predicts widespread industry implications from the implementation of Solvency II with the primary areas of impact including increased consolidation, capital raising, changes in product offerings, investment portfolio realignment, and reinsurance usage.
Regulatory Equivalence under Solvency II is where the European Union (EU) recognizes a foreign country's regulation (such as the U.S.) as being equivalent to that of the EU. If deemed equivalent, then the EU would accept the regulatory regime for subsidiaries operating in the foreign country. Without equivalence, it could be more burdensome for European insurers to operate in that country.
Fitch plans to release a special report on Solvency II Regulatory Equivalence in the next few days.
The full report, 'Solvency II: Primer for U.S. Analysts', is available at 'www.fitchratings.com'.
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