Insurers will remain cautious when managing capital in the lead-up to the January 1 implementation of the Solvency II European regulatory system, Moody’s says.

The ratings agency says there is pressure on capital ratios amid historically low interest rates and possible regulatory requests to adjust internal models.

Moody’s VP Benjamin Serra expects Solvency II ratios on January 1 will be lower than last year’s economic capital ratios.

“Regulators will likely request changes to calibrations, or impose capital add-ons, before approving insurers’ internal models for Solvency II use,” he said.

“Combined with the decrease in interest rates, this will likely drive Solvency II ratios below current economic capital ratios.”

Moody’s has observed modelling inconsistencies among European insurers, mainly regarding assumptions on US equivalence and capital charges for sovereign debt.

Pressures on regulatory solvency ratios have led some insurers to increase their capital, it says.

Insurance groups with the highest interest rate risk exposures will experience greater pressure on their Solvency II ratios, the report notes.

This applies to some life insurers in Germany, the Netherlands and Norway.

Although low interest rates are affecting insurers’ investment returns and profits, Moody’s believes insurers will not be in a position to substantially modify their asset allocations this year and increase asset risks to lift investment yields.

The Solvency II regime requires insurers to hold risk-sensitive capital charges for any assets they hold. This means increased asset risk would further lower regulatory solvency ratios.