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, according to Fitch Ratings.

Fitch said many insurers are applying various transitional measures, which will strongly affect their metrics; some are using internal models rather than the standard formula; and some regulators are taking a tougher stance than others in how they interpret and apply S2. Given these inconsistencies, Fitch said it is not using S2 metrics directly in its ratings.

In a paper released on 11 January, Fitch Ratings said: "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."

According to Fitch Ratings, there are also 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.

Fitch said 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.

The ratings agency added that regulators are planning to review S2 in 2018, so there may be important changes still to come.
In the meantime, it said many insurers will refine their existing internal models or prepare new models for regulatory approval in 2016.

Fitch Ratings said: "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."