Moody's warns of negative credit consequences from Solvency II capital relief plans

By Rebecca Delaney

July 18 - (The Insurer) - The European Commission opened a consultation on July 17 on proposals to specify technical rules under the Solvency II review for the (re)insurance sector.

Opinions diverge on the extent to which these measures will free up insurers' capital for economic investment into the European Union.

The outline of Solvency II reform was agreed in December 2023, with the European Commission and the European Insurance and Occupational Pensions Authority (Eiopa) currently developing implementing legislation and technical standards.

Once agreed by Eiopa, the EC and the European Parliament, the technical standards will feed into the final legislative package for Solvency II reform, which is expected to take effect in 2027.

The delegated acts and technical standards will have a significant impact on the application of the revised capital rules, particularly the calculation of own funds (which is the main measure of Solvency II capital) as a result of a lower risk margin, as well as lower solvency capital requirements for certain types of assets to enable more flexible eligibility criteria to apply reduced charges for long-term equity investments.

Easing capital requirements aims to unlock billions in capital to invest in the EU, contributing to it's goals around competitiveness, sustainability and resilience.

At a hearing of the committee on economic and monetary affairs last month, an EC representative said that based on the commission's latest proposals, insurers’ combined own funds would increase by around 60 billion euros.

Insurance Europe said the consultation marked an opportunity to address "excessive conservatism and volatility" in the current prudential framework.

The body argued that insurers are well positioned to support the EU as long-term investors in infrastructure, the green and digital transitions, and economic security -- but added that the sector’s ability to contribute to the EU’s growth objectives depends on the final Solvency II rules "striking the right balance".

"The Solvency II review is a test of the EU’s growth and competitiveness ambitions," commented Angus Scorgie, head of prudential regulation and international affairs at Insurance Europe.

"European insurers want to contribute to achieving them, but compared to countries such as the U.S. and Japan, they are required to hold significantly higher capital buffers. Solvency II calibrated adequately could unleash billions more into Europe’s economy and maintain very high levels of policyholder protection."

However, Eiopa has argued that permitting insurers to operate with lower capital and higher risk exposures could create more systemic risk.

A sector comment from Moody's Ratings on Friday similarly argued there is no guarantee that lowering insurers' capital requirements would trigger desired economic investments -- and warned that any such reduction would be seen as credit negative.

"European lawmakers and the EC in particular have since 2023 shifted their focus to strengthening the EU’s economic competitiveness, for example by reducing the regulatory reporting burden for companies and mobilising private capital for investments in the economy," said Moody's.

"While it was clear that the Solvency II review would result not only in more economic Solvency II ratios, but also in some capital relief for the industry, we believe the EC is pushing for higher capital relief than initially planned as part of the current technical negotiations."

Moody's added that it is currently unclear if large publicly-listed insurers would invest freed up capital in the way that lawmakers currently assume, as strict capital management approaches would likely see shareholders push for the distribution of excess capital.

"The picture might be different for mutual and other non-shareholder oriented insurers, which might be more willing to maintain higher Solvency II ratios or to deploy capital into riskier investments," Moody's added.

The consultation runs until September 5.