Fitch: Solvency II Could Increase US (Re)Insurer Opportunities

NEW YORK & CHICAGO--(BUSINESS WIRE)-- Higher capital requirements for some business lines under Solvency II (S2) could create additional opportunities for US (re)insurers, according to Fitch Ratings.

S2 incentivizes EU insurers to reinsure longevity risk as capital charges for counterparty risk with highly rated reinsurers are low compared with charges for longevity risk. US (re)insurers stand to gain as they are not affected by the higher charges that S2 imposes on EU (re)insurers. The US capital requirements are deemed equivalent to S2 despite typically being lower.

An EU company ceding certain risks to a (re)insurer outside the S2 framework could gain a relative advantage over an EU company that retains the risk.

Fitch believes that S2 generally makes it less attractive for US companies to own EU-based subsidiaries, which are subject to the more onerous capital requirements of the new EU regulatory framework. This could lead US insurers to redeploy capital to markets with lower capital costs if they cannot pass the costs of operating in the EU to policyholders. The S2 requirements are particularly punitive for spread-based products with long durations (i.e. annuities), particularly while low bond yields persist.

The full implementation of S2 will not occur immediately, as its application will be smoothed out over 16 years. Many insurers are taking advantage of transitional measures to ease in the new requirements gradually.

The US has been granted S2 equivalence for a provisional period of 10 years for solvency calculations. This means that US subsidiaries of EU insurers are not subject to additional capital requirements from S2, which might have put them at a competitive disadvantage relative to US-owned insurers.

Additional information is available on www.fitchratings.com.

The above article originally appeared as a post on the Fitch Wire credit market commentary page. The original article, which may include hyperlinks to companies and current ratings, can be accessed at www.fitchratings.com. All opinions expressed are those of Fitch Ratings.

Solvency II Creates Opportunities for U.S. Life (Re)insurers (But Capital Charges Deter U.S. Insurers from Owning EU Subsidiaries)

https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=878989

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View source version on businesswire.com: http://www.businesswire.com/news/home/20160317005732/en/

Fitch Ratings
Dafina Dunmore, CFA
Director
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Fitch Ratings
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Source: Fitch Ratings

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