Solvency II may have rating implications for European insurers that are unable to raise additional capital or sufficiently reduce required capital through de-risking, Fitch Ratings says in a special report. The latest QIS5 regulatory capital proposals may increase capital requirements for insurers compared to earlier proposals, and Fitch says any rating implications will depend on the severity of that increase. However, the impact on the regulatory capital of insurers across Europe remains uncertain until the European Commission makes its final decisions on the Level 2 implementing measures which will be based on the results of QIS5 (Quantitative Impact Study 5) published in April 2011.

‘We expect that the proposals are likely to raise capital requirements for the industry in aggregate, although the impact of QIS5 compared to QIS4 on the solvency capital ratios of individual insurers will depend on the insurer's business mix and movements in the balance sheet from 2007,’ says Clara Hughes, associate director in Fitch Ratings' insurance team. ‘This could have rating implications for individual insurers if final Solvency II requirements are significantly more onerous than under the current regime’.

There are a number of options available for companies with shortfalls in available capital to meet Solvency II requirements, however the last 12-24 months have shown that insurers may not always be able to access capital markets at times when there is the strongest need for capital, says Fitch.

The report discusses six key areas where Solvency II is considered in Fitch's rating analysis: the expected regulatory solvency position on implementation, sources of additional capital, options for reducing capital requirements, the composition of own funds and allowance for hybrid debt, the use of internal models and life insurance-specific issues.

The report, entitled ‘Solvency II - Considerations for Credit Rating Analyses,’ is available at www.fitchratings.com.