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  • August 2015
08

UK life insurers 'on track' on capital positions under Solvency II

Open-access content Friday 21st August 2015 — updated 2.33pm, Thursday 30th April 2020

Major UK life insurers appear to report strong capital positions under Solvency II, according to Fitch Ratings.

2

However, the rating agency said there was a "lack of detailed disclosure" in firms' latest half-year results, which have been published over the past few weeks, given these were the "last significant scheduled opportunity" for insurers to provide more detail before the regime takes effect in January 2016.

But Fitch Ratings said this was a "sensible approach," as the decision as to whether internal models submitted by insurers to the Prudential Regulation Authority (PRA) will be approved would not be announced until December.

Fitch said: "This may have disappointed investors hoping for detailed guidance, but despite the lack of hard numbers, other factors suggest initial Solvency II capital levels are likely to be strong."

These factors include the PRA's emphasis that transitional benefits are a valid part of the Solvency II regime and should be considered as capital, including when insurers assess their capacity for paying dividends to shareholders.

Fitch said: "The major insurers announced substantial interim dividend increases with their results. This is consistent with their growth in cash generation.

"But given their conservative approach to capital management, we do not believe these increases would have been announced if there had still been significant uncertainty over likely Solvency II capital levels."

The agency said the directive's requirements were "significantly less onerous than initially planned" due to transitional arrangements, which phase in new requirements over many years, and the introduction of the matching adjustment. If these are approved by the PRA, firms can reduce capital requirements under Solvency II.

"It is clear that many insurers will take advantage of the transitional measures, even if they would have a strong capital position without them," said Fitch. 

"However, while we recognise the benefits of transitional measures from a regulatory perspective, they mean that Solvency II will initially not be a fully risk-based approach. Where an insurer uses transitional measures, Solvency II will start with some elements on a non-risk-based Solvency I basis, and move only gradually over many years to the full risk-based Solvency II basis."

This article appeared in our August 2015 issue of The Actuary.
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