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Solvency II “may not provide a reliable picture of the underlying economics”: A.M. Best

22nd May 2017 - Author: Steve Evans

Rating agency A.M. Best has said that it does not intend to use the Solvency II regime disclosures of solvency and financial condition as inputs for its own rating methodology, saying they “may not provide a reliable picture of the underlying economics of an insurer’s balance sheet at either the detailed or corporate level.”

This is A.M. Best’s opinion on the use of Solvency II ratios and results of the solvency and financial condition reporting (SFCR) that was published at the end of last week for singe-entity insurers and will be published by European insurance and reinsurance group’s on July 1st 2017, in its rating process.

A.M. Best said that it won’t use the Solvency II results directly in its rating process, as “quantitative assessments of risk-adjusted capitalisation are made using its proprietary Best’s Capital Adequacy Ratio (BCAR) model.”

While Solvency II is intended to be risk based and represents the regulatory environment in Europe, A.M. Best believes that it “may not provide a reliable picture of the underlying economics of an insurer’s balance sheet at either the detailed or corporate level, and neither does it provide comparisons across insurers on a global basis.”

However, A.M. Best said that data from Solvency II could influence some of the inputs into its BCAR model, with inputs related to available capital in life insurance operations of European re/insurers the most likely area.

The rating agency does not foresee any direct impact to its ratings of European insurers and reinsurers at this time, and it believes that most companies will maintain solvency capital ratios of well above 100%.

But it does say that it will “ascertain the relevance or otherwise of disclosures to its own assessment of the underlying economic level of solvency” which suggests that any drop in reported Solvency II SCR would trigger a reassessment by the rating agency.

A.M. Best also notes that as part of a holistic view of a re/insurers operating health, “To the extent that Solvency II influences an insurer’s behaviour, A.M. Best believes that there will be a longer-term effect on performance, pro le and, ultimately, solvency.”

The Solvency II reporting was never designed as a rating input, but it will provide a valuable source of additional monitoring on a re/insurers health and financial stability, hence the rating agencies will be watching the reporting closely.

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