S&P Global Ratings suggest that the government’s announcement of its proposed change to Solvency II is likely to be neutral for the creditworthiness of rated insurers in the UK as it expects them to broadly maintain their capital positions.
The report comes following the UK Government receiving widespread approval from the re/insurance industry after Chancellor Jeremy Hunt promised that scrapping of certain EU rules in Solvency II reforms will unlock tens of billions of pounds of investment across a range of sectors.
S&P suggests that the government’s decision to keep its existing approach to fundamental credit spreads instead of its original proposal will provide some stability for UK life insurers’ capitalisations and business positions, notably for annuity writers that may have been the most negatively affected by the original proposal.
The proposed 65% reduction in the size of risk margins will materially improve the solvency ratios of UK life players, especially those with significant long-term exposure.
Because the risk margin does not directly influence our view of an insurer’s capital and earnings, the change is unlikely to lead us to raise our ratings on UK-based insurers.
We note that the reform will facilitate UK life insurers’ access to a wider pool of long-term assets, supporting their current business positions in the annuity risk space through being able to match the long-term profiles of their liabilities.
While the changes are mostly positive for the industry, we will continue to look out for any potential negative second-order effects on our view of rated UK life insurers’ financial risk positions.
This may result from unexpected releases of capital, unexpected changes in risk profiles due to shifts in the compositions of UK insurers’ long-term investment portfolios, or material changes in appetite for longevity risk.