The significant regulatory reforms facing the global insurance industry over the next few years shouldn’t impact their credit ratings, says Fitch Ratings.
In a new report, the rating agency suggests that insurers’ ratings are likely to be unaffected by the changes to international regulation that are to be adopted over the next few years. For instance, Fitch notes that while some insurers will face higher capital requirements, which could negatively affect the cost of capital and competitiveness, it also says that it believes these insurers are already well capitalized. Additionally, Fitch says that the increased focus on regulation will also lead to further improvements in risk management.
A key concern for insurers, Fitch notes, is that new rules take account of the differences between insurers and banks. In particular, it says that differences in the businesses mean that insurers tend to pose less systemic risk than banks.
The main area where insurers may pose greater systemic risk, it says, is in non-core activities, such as derivatives and products with complex financial options and guarantees. “These can change insurers’ risk profiles, making them more susceptible to short-term risks,” it says; noting that the International Association of Insurance Supervisors (IAIS) is focusing on these areas.
Fitch says that the work being carried out by regulators on global systemically important insurers (G-SIIs) should mitigate some of this risk.
“The IAIS has developed a highly ambitious timetable in conjunction with the Financial Stability Board (FSB) for the implementation of the new regulations. This may mean that key factors are overlooked or there are unintended consequences,” it says. However, Fitch also says that it expects delays to the IAIS’s implementation timetable.