Analysts at S&P Global Ratings have warned that the UK Treasury’s Review of Solvency II ahead of Brexit could result in some operational and expense challenges for re/insurers with operations spanning the UK and European Union (EU).
The rating agency acknowledged that the review is unlikely to cause a significant impact to financial strength ratings.
However, it did not rule out negative second-order effect if the review leads to deviations from Solvency II and equivalence is not achieved.
These could include unexpected capital management actions due to capital relief through a reduction in risk margin, or deteriorated capital adequacy, due to changes in UK re/insurers’ investment portfolios.
“In our view, the PRA has a strong track record of oversight and intervention, and the U.K.’s regulatory solvency framework is sophisticated,” S&P said.
“We do not anticipate developments in the U.K.’s solvency framework to significantly depart from the existing framework, to hinder prospective profitability, or to weaken the insurance sector’s enterprise risk management and disclosure requirements.”
S&P further noted the sensitivity of risk margin to interest rates, an aspect that alters the size and volatility of insurers’ solvency ratios, especially for UK life players that can have material long-term longevity exposure.
The review could therefore could give way to an alternative method that leads to a lower risk margin, reduced volatility, and improved solvency ratios.
Changes in risk margin that lower capital needs, however, could increase the competitiveness of the UK re/insurance market.
Also, were a revision of the risk margin to usher capital relief into the industry, S&P expects most of the excess capital to stay within the industry to support solvency levels.
That said, if insurers allocated the excess capital for capital management actions, like additional dividends or growth, an adverse impact on capital adequacy is possible.
