Nordic insurers will need to make bigger adjustments to their investment portfolios because of the likely requirements of Solvency II, Fitch Ratings says. Equities, which will attract a higher capital charge than short-dated high-grade fixed-income securities, make up 25%-40% of Nordic insurers’ portfolios compared with a European average of 8%.
We have already seen many European insurance companies reducing equity exposure, largely as a result of the financial crisis but also in anticipation of Solvency II. This could have a positive effect on corporate bond issuers – insurance companies represent a major source of demand in the Nordic regions.
Life insurance products with guaranteed returns, which account for two-thirds of life insurance premiums in the Nordic countries, face high capital charges under Solvency II. We do not expect supply to disappear, but we do think that companies will need to adjust to maintain shareholders’ returns – tightly controlling costs and merging to exploit economies of scale.
The effects will not be dramatic in the short term. We think that Nordic insurers are adequately capitalised to meet the more stringent requirements, and we expect any changes in asset allocations or business practices to happen gradually – Solvency II is not expected to come into effect until 2014, with the changes then being phased in to smooth the transition.
