Analysts at Fitch Ratings have assured that recent proposals made by the UK Government concerning Solvency II rules are unlikely to affect the ratings of insurers.
Set out in a consultation paper last month, the proposals on Solvency II include an intention to cut the risk margin for carriers, a move that would free up a lot of capital on company balance sheets.
Fitch believes the proposals could make available more than £10 billion of capital and incentivise the UK life sector to invest more in long-term assets, such as infrastructure, to boost the economy.
Life insurers are expected to deploy this capital to seek higher returns, but analysts believe they will still maintain strong capital levels to support their current ratings.
“We believe they will stay within their risk appetites and avoid depleting their capital enough to jeopardise ratings,” analysts said. “Most UK life insurers have strong capital headroom in their ratings.”
Fitch notes that the proposed reduction in regulatory capital requirements will give insurers scope to take on more risk.
In particular, a lighter regulatory capital burden associated with long-duration liabilities will make illiquid credit assets more attractive to hold.
Assuming the proposals go ahead as set out, Fitch estimates that the UK life sector could allocate up to £200 billion to illiquid investments over the next ten years, compared to an estimate of £170 billion before the current plans were announced.
The sector’s exposure to illiquid assets has been growing steadily but we expect it to remain moderate, even given the government proposals.
But Fitch did caution that a significant decrease in the credit quality of insurers’ investment portfolios, or a significant increase in asset concentration risk, would clearly be credit-negative.
The EU is also proposing to ease the Solvency II capital burden associated with long-duration liabilities, with proposed reforms that could release significant amounts of regulatory capital for investment and give a boost to European life insurers’ growing interest in assets with environmental, social and governance (ESG) characteristics.
