Standard & Poor's says that though delayed, the proposed European framework for insurance regulation, Solvency II, is still needed, in a report published on Wednesday, "Q&A On The Future Of Solvency II: Pragmatism Is Likely To Prevail."
The remarks in the report represent Standard & Poor's views expressed at a recent conference about Solvency II in Dublin, sponsored by the non-profit financial services industry group Eurofi.
The rating agency says "The prospect of a prolonged period of low interest rates in the EU and fragile economies across the region are negative rating factors for several of the insurance companies we rate.
"Uncertain and evolving regulations, like Solvency II, are further undermining investor confidence in the sector," said Standard & Poor's credit analyst Rob Jones. "Regulatory uncertainty is also delaying the restructuring of business models and investment decisions."
The insurance companies most exposed to low interest rates and weak economic growth are life companies that provide guaranteed returns to policyholders. We have recently downgraded several of these companies, or have revised or kept the outlooks on their long-term ratings at negative.
Solvency I is virtually devoid of incentives for good risk management and lacks capital requirements for asset risk. The diverse forbearance measures that regulators are currently using illustrate the shortcomings of the current framework.
In view of the current monetary and economic context, the European Commission has asked EIOPA (European Insurance and Occupational Pensions Authority), the European body that is developing Solvency II's technical standards, to study:
-The continued availability and affordability of insurance products containing long-term guarantees; and
-The future investing behaviour of insurers affecting the financing of infrastructure projects, securitizations, small and midsize enterprises, among other things.
"These regulatory topics are deeply intertwined with the prospects for the European economy. For this reason, further significant changes in Solvency II are likely to result, and pragmatism is likely to prevail over principles," said Mr. Jones. "In the meantime, we commend EIOPA's efforts to maintain the momentum of the Solvency II project, specifically through the Preparatory Measures it first announced in December 2012."
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