Solvency II Already Impacting Insurers

Though not due to be implemented until 2013, the European Union's Solvency II requirements are currently altering business practices at some insurers and reinsurers, a new report from Moody's Investors Service contends.

The report, "Higher Solvency II Capital Requirements Are Altering the Business Strategy of European Insurance Groups' U.S. Life Insurance Operations," says insurers have begun steering away from products sensitive to interest rate spreads.

"Spread-based products are likely to see some of the largest increases in required capital," says Moody's VP and author of the report, Laura Bazer. "Many European-owned U.S. life insurers have significant exposure to these products, which, along with de-risking initiatives, have already led some to de-emphasize or exit certain U.S. product markets."

Individual fixed, immediate, equity-indexed annuities, and guaranteed investment contracts/funding agreements would be among the product types most affected, Bazer says.

Moreover, whether the U.S. regulatory system is considered "equivalent" to the new Solvency II regime will be crucial in determining Solvency II capital charges for some European-owned U.S. insurance companies.  Moody's expects "transitional equivalence" to be granted to the United States once Solvency II is implemented, given the importance of the U.S. and European insurance markets to each other.

"Regulatory equivalence would allow for the continued use of lower local capital requirements in group solvency calculations, and without it, some European-owned U.S. subsidiaries could be competitively disadvantaged," Bazer adds.

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