The Europe, Middle East and Africa (EMEA) insurance sector is strongly capitalised, according to a report from Fitch Ratings.
The report was compiled using Fitch’s Prism Factor-Based Model (Prism FBM), which was launched in September 2014
Fitch’s EMEA insurance portfolio has been characterised as being “strongly capitalised”, with 82 percent of entities scoring “Extremely Strong”, “Very Strong” or “Strong”, typically above or in line with its ratings.
Most ratings are constrained by factors other than capital, such as low profitability, high financial leverage, sovereign constraints, limited scale or lack of business diversification.
Net equity is the largest component of Fitch-calculated Total Available Capital (TAC). However, it accounts for only 47 percent of TAC across the portfolio, as there are several other important components.
Capital buffers, eg, funds for future appropriation, account for 14 percent of TAC, subordinated debt accounts for 15 percent, and value of in-force business accounts for 13 percent.
For life insurers, Target Capital (TC) is dominated by asset risk, which accounts for 65 percent across the life portfolio.
For non-life insurers and reinsurers, the largest components of TC are asset, catastrophe, motor, property and liability risk, which Fitch claimed is representative of the business mix in the portfolio.
Asset risk is the largest component, accounting for 24 percent of TC, but it is significantly lower than for life insurers because non-life insurers and reinsurers generally focus on taking insurance risk and tend to minimise asset risk.
Prism FBM also gives credit for diversification between product lines, asset types and types of business.
Diversification benefit across Fitch's EMEA portfolio ranges from 5 percent to 35 percent (as a percentage of TC), with composite insurers having the largest benefit, typically around 25 percent to 30 percent, according to the report.
To assess capital adequacy, Fitch considers Prism scores, regulatory solvency, leverage metrics and insurers' own capital models.
