UK insurers 'on track' to meet Solvency II capital requirements, says Fitch

The UK's leading insurers did not include details of their preparations for the new Solvency II regulatory regime in their recently-published half-year results, which Fitch said was the "last significant scheduled opportunity" for them to do so. However David Prowse, the agency's senior insurance director, said that interim dividend increases by most insurers signalled most felt secure about their current capital levels.

Prowse said that insurers' lack of disclosure at this point was "sensible", given that the Prudential Regulation Authority (PRA) is not expected to confirm the suitability of their approaches to the new capital requirements before December.

Insurance law expert Bruno Geiringer of Pinsent Masons, the law firm behind Out-Law.com, said that Fitch's findings were "very welcome" and reflected "the hard work and efforts of the industry in its preparations over many years and the PRA's process of consulting with the industry and working together with it to develop a measured approach to the transition".

"The PRA should also be congratulated for providing investors in the insurance industry with a measure of assurance that the UK insurance business will transition smoothly to Solvency II by creating reporting templates, opportunities for approvals of the matching and volatility adjustments and guidance on the way that surplus funds, third country branches, pension risk and group own funds, amongst other things, will be treated," he said.

More than 400 retail and wholesale UK insurance firms, as well as the Lloyd's insurance market, will be covered by Solvency II when it comes into force across the EU on 1 January 2016. The new rules set out broader risk management requirements for European insurers and require firms to hold enough capital to cover all their expected future insurance or reinsurance liabilities.

David Prowse of Fitch said that the requirements of the new regime were "significantly less onerous than initially planned" due to the transitional arrangements that had been put in place and because of the introduction of the 'matching adjustment'. Firms will have to apply to use the matching adjustment but, once approved, will be able to reduce their capital and reserving requirements by 'matching' long-term liabilities with long-term assets that they also hold.

"It is clear that many insurers will take advantage of the transitional measures, even if they would have a strong capital position without them," he said.

"However, while we recognise the benefits of transitional measures from a regulatory perspective, they mean that Solvency II will initially not be a fully risk-based approach. Where an insurer uses transitional measures, Solvency II will start with some elements on a non-risk-based Solvency I basis, and move only gradually over many years to the full risk-based Solvency II basis," he said.