Tightened solvency frameworks may trigger another round of mergers and acquisitions, according to a new report from Standard and Poor’s (S&P).

The ratings agency believes regulators will introduce more risk-sensitive solvency frameworks that will affect how Asia-Pacific insurers manage their investment and product strategies.

This will drive them to seek more efficient capital management and optimised growth opportunities, the report says.

“This is also likely to encourage greater industry consolidation and improve market discipline.

“Strengthening prudential regulatory requirements in Australia and New Zealand have made it harder for smaller insurers in those markets to compete, raising the likelihood of mergers and acquisitions.”

The report says small insurers in New Zealand have found it harder to afford reinsurance for extremely rare losses, such as one-in-100-year events.

Changes by national regulatory authorities to investment ceilings are cross-border activities that will create additional risks for insurers, S&P warns.

“Despite the relaxation of investment ceilings, we believe major insurers will maintain adequate risk appetites and assessment models to keep their growing capital risks at manageable levels,” the report says.

“But increased asset allocation in high-risk assets and overseas investments could raise insurers’ sensitivity to financial market volatilities and pressure financial risk profiles.”

S&P says the improving regulatory regime for Asia-Pacific insurers will make the industry more resilient to unforeseen events.

“We believe the work of Asia-Pacific insurance regulators is converging in terms of building the required framework and strategy to achieve this goal.

“This includes efforts to establish a common capital assessment for systemically important or large and complex financial groups.

“We also expect that regulatory initiatives to implement an increased risk-based capital requirement across Asia-Pacific will bring insurers’ risk management frameworks more in line with global insurance standards over the long term.”