Plans for a new risk-based capital standard for large, global insurers represents a new source of uncertainty for the industry, says Fitch Ratings in a new report.
The rating agency said Thursday that the International Association of Insurance Supervisors’ (IAIS) proposal to develop a risk-based global capital standard could turn into a positive for insurers, in terms of investor perception and firms’ resilience; but that, in the current environment, it simply adds further uncertainty for the insurance industry.
“The standard could ultimately be positive for insurers from a comparability and consistency perspective, in terms of how they are viewed by global investors. However, it comes at a time when there are already other important related initiatives under development and adds to existing uncertainties. Moreover, in practice, the impact will depend on the exact nature and details of what’s proposed,” it says.
Fitch says that it’s expected that the proposed standard would apply to about 50 internationally active insurance groups, and that full implementation is planned for 2019. Yet, the proposal comes at a time when regulators are already working on a new supervisory framework for large insurers, and developing backstop capital requirements for globally systemically important insurers, which they aim to have ready for implementation in late 2014, it notes.
Indeed, it expresses doubts about whether the regulators will be able to bring the initiative in on time. “The IAIS have given themselves three years to develop the standard, followed by two years of testing and refinement. However, we believe this five-year timeframe is still ambitious, and delays would not be a surprise based on experience with other comparable projects,” Fitch says, noting that it is difficult to develop a single standard to apply across a number of different countries with diverse insurance markets.
“With all else being equal, higher capital requirements would be positive for ratings if they lead to higher capital resources being held by companies. But we note that most of the major insurers likely to be affected by the new standard are already well capitalized and relatively highly rated,” it says. And, the ratings for those companies are also generally not constrained by capital, it notes.
And, any positive effects as a result of increased capital could be partly offset by negatives from the cost of higher capital and its impact on pricing and competitive position, Fitch adds. “We believe the impact will also depend on how consistently individual national regulators interpret and apply any eventual standard that emerges, as well as the degree of effective coordination between the various different national regulators responsible for any given [insurer],” it says.