The global increase in cases of regulatory forbearance in the insurance industry exacerbates long-term risks for creditors, says Moody's Investors Service in a new Special Comment published today. While temporary relaxation of conservative regulatory requirements is generally aimed at limiting market disruption, it is a high-risk strategy that can be credit negative.
The report, "Global Insurance: Increased Regulatory Forbearance Poses Risks For Insurance Creditors" is now available on www.moodys.com. Moody's subscribers can access these reports via the links provided at the end of this press release.
"Regulatory forbearance offers relief from short-term pressures and creates time for insurance companies to adapt their strategies to a challenging environment. In some cases, a temporary relaxation of regulatory requirements that, with hindsight, were conservative, can allow firms to continue trading and re-build capital buffers. But forbearance can also increase risk exposures and elevate risk appetite. Insurers might take more risks than regulators would typically allow and/or delay corrective action to shore up their financial positions in the face of adverse market conditions," explains Simon Harris a Managing Director in Moody's Financial Institutions Group.
Moody's says that the relaxation of regulatory standards can encourage insurers to retain deteriorating assets or businesses. In Europe, insurance regulatory forbearance -- in Italy, Switzerland and the Netherlands for example -- has focused on reducing pressure arising from falling asset values or persistently low interest rates. These practices may encourage insurers to retain, or even increase their exposure to assets that ultimately incur losses, or delay de-risking initiatives to reduce product guarantees or reliance on spread income. If the affected companies fail to recover, creditors could experience even greater losses than if the forbearance had not been extended.
"We believe that frequent regulatory forbearance may reflect a weakening of regulatory control. As regulators soften or by-pass their own controls over capitalisation, forbearance may undermine investors' confidence, as solvency ratios become difficult to understand and predict, causing customers and investors to feel less protected," adds Nadine Abaza, a Moody's Associate Analyst for European Insurance.
Regulatory forbearance does not affect Moody's assessment of capital but typically signals credit weakness. Moody's evaluation of insurers credit profiles is driven by the credit challenges leading to regulatory forbearance, such as falling asset values and weakened capitalisation. In the rating agency's view, the credit impact of any forbearance measures, to be evaluated case-by-case, will vary depending on the economic environment, the strength of existing regulatory frameworks, market conditions and issuer specifics prevalent at that time.
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