Ratings agency Fitch gives its verdict on the impending legislation

Solvency II will change how insurers allocate their assets and transform demand and pricing for several asset classes, according to a report by ratings agency Fitch.

Solvency II (due to come into effect on January 1 2013, although delays seem likely) will require insurers to value assets and liabilities at market value in determining their solvency position.

Clara Hughes, Director of Fitch's Insurance team said: "Solvency II will force insurers to set aside explicit capital to reflect short-term volatility in the market value of the assets they hold.”

She continued “Insurers' asset allocations will be heavily influenced by these capital charges, which vary significantly by asset class, quality and duration.”

Fitch believes that Solvency II's affect on the market will be staggered as implementation is phased in.

These changes may reduce the amount of insurance capacity available to UK businesses and increase the cost of cover.

John Hurrell, CEO at AIRMIC previously said “The sharp increase in capital requirements for insurance companies under Solvency II means that there will be less choice of insurance, less flexibility and greater cost. Insurance companies do not pose systemic risk to the economy and, unlike many banks, they have not been found wanting in the recent financial crisis.”

The recently published report stated that the main impacts of Solvency II on insurers assets will be:

  • A shift from long-term to shorter-term debt
  • An increase in the attractiveness of higher-rated corporate debt and government bonds
  • Diversification of large asset holdings
  • An increase in the attractiveness of covered bonds
  • A preference for assets based on the long-term swap rate and a shift from short-dated paper to deposits