OREANDA-NEWS. Solvency II (S2) metrics are not comparable between insurers due to their different calculation approaches and will therefore not be a direct driver of ratings, Fitch Ratings says. Inconsistencies arise because many insurers are applying different transitional measures, which will strongly affect their metrics. Some are also using internal models rather than the standard formula and we believe some regulators are taking a tougher stance than others in how they interpret and apply S2.

We will continue to assess insurers' capital primarily using our Prism Factor-Based Capital Model, as we believe Prism scores are more comparable than S2 metrics. We view S2 disclosures as supplementary information, which we will evaluate particularly for insurers with unexpectedly weak or sensitive S2 metrics.

Widespread use of transitional measures to phase in the effects of S2 over several years will distort comparisons between insurers as they boost S2 metrics to varying degrees, often significantly. Many insurers also calculate their S2 positions using internal models based on their own risk calibrations. These models are complex and lack public visibility, and differ from each other and from the standard formula, often resulting in lower capital requirements.

There are some significant uneconomic influences on S2 ratios, such as the 4.2% ultimate forward rate (UFR), which is used to extrapolate the forward curve for valuing very long-term liabilities. Although there is rationale for this figure, it looks high relative to current long-term yields, potentially leading to an overstatement of the economic capital position. In recognition of this, the Dutch regulator has said that insurers should take into account the effect of the UFR on their capital levels when setting dividends.

Regulators are planning to review S2 in 2018, so there may be important changes still to come. In the meantime, many insurers will refine their existing internal models or prepare new models for regulatory approval in 2016. S2 metrics are therefore subject to potentially significant restatements, reflecting methodology/modelling changes rather than genuine changes in risk profile, at least until the new regime has bedded in.