Fitch: Life Industry Is Overcapitalized

The strong capitalization levels are not surprising, Meyer says, given the benign credit environment and strong stock market performance that prevailed in 2006.

The life industry’s capitalization was also helped by mutual life insurers that focus on whole life insurance products that require less capital, according to Meyer.

“Prism indicates that whole life insurance requires very little capital, often as little as 2% of reserves at the AA capital level threshold,” Fitch analysts write in a discussion of the results. “This in part is based on recognition that much of the product performance deviation can be passed to the policyholder via the dividend mechanism.”

Fitch is finding that the Prism capital model requires more capital for variable annuity products than required by the C3 Phase II approach that most regulators and insurers now use, Meyer said.

The Fitch model ends up requiring more capital for VA products because of differences in the way the Fitch model handles hedging and the weighting given to risk measurements, Meyer said.

During the call, Julie Burke, another Fitch managing director, said 2006 was a “banner year” for most insurance companies as measured by the Prism capital model.

Going forward, the stochastic model will be “an integral part of the ratings analysis, Burke said.

The development of the Prism model fits with European efforts to develop the Solvency II framework and U.S. efforts to shift to principles-based reserving, she said.