The European Union’s pending Solvency II requirements may stress small or insufficiently diversified carriers, a new report finds. The proposed requirements, due to be implemented toward the end of 2012, will have negative credit implications for some insurers, says new York-based Moody's Investors Service.

"In our view, although regulatory capital requirements will increase, most of the insurers we rate are unlikely to raise capital, simply because of Solvency II," says Moody's VP & Senior Credit Officer Dominic Simpson, who also authored the report. "However, from an industry perspective, Moody's believes that several companies, especially smaller ones with little business-line diversity, may need to raise capital or alter their business or investment mix to meet the new, increased capital requirements of Solvency II.”

While Solvency II is expected to provide capital relief for diversification, particularly for insurers that rely on integrated internal risk models, Moody's also says it expects some consolidation or acquisition by larger groups of small and medium-sized companies.

"Moody's questions whether small carriers, if they needed to raise capital, would be able to access the capital markets, especially with limited capital-raising track records," Simpson says. "However, a major credit positive of Solvency II is that it raises the bar with regard to (re)insurers' implementation of effective risk management systems, including strong incentives to advance internal models.”

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