November 20, 2017 / 3:29 PM / a year ago

Fitch: Italian Insurance Profit-Sharing Plan is Credit-Positive

(The following statement was released by the rating agency) LONDON, November 20 (Fitch) The Italian insurance regulator's proposal to allow insurers to smooth the distribution of realised capital gains over eight years on new contracts is credit-positive for the country's life insurers, Fitch Ratings says. It could revive the with-profits savings market and gradually make balance-sheet liabilities less sensitive to interest rates. However, the rating implications would be limited, at least in the short term, as it would take several years for the new contracts to represent a significant proportion of insurers' balance sheets. The new profit-sharing mechanism would give insurers more flexibility in deciding when to realise gains, as they would no longer have to immediately convert all realised gains into policyholder guarantees. Instead, they could keep some of the gains in a bonus fund to help support future additions to guarantees, particularly in years when investment returns are weak. A similar system operates in the French and German insurance markets. Guarantees constrain insurers' investment freedom as insurers need to hold low-risk backing assets of similar nature and duration to the guarantees - typically highly rated bonds - to limit market and interest-rate risk. Guarantees also generate significant regulatory capital requirements, which have become more onerous as a result of low interest rates and the introduction of Solvency II (S2). In contrast, the bonus fund, although held as a reserve ultimately for policyholders, would not contain guarantees or generate significant market or interest-rate risk for the insurer, would have lower capital requirements and would allow insurers greater investment freedom. Insurers have been calling on the regulator for a less rigid profit-sharing framework and we expect the proposal will proceed, with the new mechanism applying to new contracts probably by late 2018. The new style of contract will be less interest-sensitive and therefore less capital-consumptive, and should help insurers to meet the strong client demand for savings products with an investment guarantee, although increases to guarantees will no longer be locked in so fast. Sales of products with investment guarantees have declined in recent years as insurers have pulled back due to increasingly onerous capital requirements for interest-sensitive business. The profile of insurers' new business is likely to shift immediately when the new system is introduced, with all newly written with-profits contracts operating under the new profit-sharing mechanism. However, the impact on balance- sheet profiles will be gradual as contracts operating under the existing mechanism will still have several years to run (we estimate about six to eight years, on average). Insurers' balance sheets will gradually become less interest-sensitive as business under the new mechanism gradually takes the place of older business. This should mean lower S2 capital requirements and we will also reflect it when assessing insurers' capital positions using our Prism factor-based capital model, treating the new-style liabilities as lower risk than the remaining old-style ones. The introduction of the new system will require insurers to operate separate funds so that it is clear which pots of assets are subject to which profit-sharing mechanism. Old-style business, already in decline, is therefore likely to be managed in closed run-off funds. Contact: Nicola Caverzan Associate Director, Insurance +44 20 3530 1642 Fitch Ratings Ltd 30 North Colonnade London E14 5GN Federico Faccio Senior Director, Insurance +44 20 3530 1394 David Prowse Senior Analyst, Fitch Wire +44 20 3530 1250 Media Relations: Athos Larkou, London, Tel: +44 203 530 1549, Email: The above article originally appeared as a post on the Fitch Wire credit market commentary page. The original article can be accessed at All opinions expressed are those of Fitch Ratings. ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEB SITE AT WWW.FITCHRATINGS.COM. PUBLISHED RATINGS, CRITERIA, AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. 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