Smoothing the way

Fraught matching adjustment applications push more firms towards transitionals

In recent months bankers and consultants serving the industry have said they are surprised by the number of UK insurers preparing applications to use the Solvency II transitional measures, with as many as half of the leading annuity providers changing their plans according to some commentators.

The sense of surprise comes for two reasons. On one hand, UK firms were expected largely to rely on the matching adjustment (MA), which would render the use of transitionals irrelevant. On the other, many market participants were concerned that stakeholders would take a pejorative view of companies that seemed to be using the measures to hide a balance sheet in poor shape.

The ground has shifted on both points. In practice, matching adjustment applications have proven to be fraught. Some firms have turned to using the transitionals for liabilities backed by assets that are ineligible for the MA. Others are thinking of the measures as a backup plan lest an MA application fails. And some have shelved matching adjustment applications altogether for now and are going to use the transitional measures to bridge the period before they are ready to proceed.

At the same time, in the UK at least, regulators have made clear they are encouraging insurers to use the measures to smooth the process of Solvency II implementation. Such regulatory accommodation calms the nerves of shareholders, who feel reassured that dividends will be safer from regulatory interference.

That might not be the case in other countries, according to some equity analysts, however. In the Netherlands, for example, De Nederlandsche Bank indicated in its April 2015 financial stability overview that insurance companies must consider an economic view of the balance sheet when formulating dividend policy rather than rely on their statutory solvency position.

The stance of other regulators around Europe on dividend policies and transitionals remains to be seen, but perhaps on this occasion UK firms will turn out to be the lucky ones.