LONDON--(BUSINESS WIRE)--A.M. Best does not expect to take rating actions as a direct consequence of the implementation of Solvency II, the new regulatory regime that comes into force on 1 January 2016 and introduces risk-based solvency requirements for insurers across all member states of the European Union.
European insurers will have to comply with a Solvency Capital Requirement (SCR), calculated to a 99.5% confidence level over a one-year period, and a Minimum Capital Requirement (MCR), calculated to an 85% confidence level. The SCR is set so that insurers should be able to withstand all but the most severe of shocks, while the MCR denotes a level below which policyholders would be exposed to an unacceptable level of risk.
In its new briefing, “Rating Actions Not Anticipated on Implementation of Solvency II,” A.M. Best believes it is extremely unlikely that rated European entities will be in breach of their MCRs when the new regime is introduced. Catherine Thomas, senior director, analytics, said: “There has been a long lead time to implementation, during which companies have focused on meeting the higher capital requirements of the SCR. Moreover, the full impact of Solvency II will be phased in over 16 years through the use of transitional measures.”
The briefing also notes that a number of rated entities have applied to their national regulator for permission to use an internal model to calculate their SCR, and that most now know if their application has been successful.
The ability to use an internal model to calculate the SCR is particularly important to companies for which the standard formula does not appropriately reflect their risk profile. Failure to achieve either full or partial internal model approval may prompt such insurers to revise their business strategy in response to regulatory capital constraints and encourage behaviour that is, from an economic point of view, sub-optimal. A.M. Best will closely monitor the impact of any change in business strategy on the financial profile of rated entities and react accordingly.
“The primary benefit of a strong internal capital model is the aid it provides company management in understanding and quantifying key risks and their correlations from a holistic point of view,” Thomas added. “In A.M. Best’s opinion, the true value of any capital model is realised only when management employs it as part of the strategic decision-making process.”
To access a complimentary copy of this briefing, please visit http://www3.ambest.com/bestweek/purchase.asp?record_code=244269.
A.M. Best Company is the world's oldest and most authoritative insurance rating and information source. For more information, visit www.ambest.com.
Copyright © 2015 by A.M. Best Company, Inc. ALL RIGHTS RESERVED.