Relatively high capital charges for securitizations under the new Solvency II European insurance rules could lead European insurers to dramatically reduce exposure to the asset class and invest in covered bonds instead, according to a report published by Standard & Poor’s Ratings Services.
The report titled “Solvency II Could Push European Insurers Away From Securitizations,” highlights how the capital charges for senior securitizations under the draft Solvency II rules’ standard formula are up to 10 times higher than those for similarly-rated covered bonds, meaning that return on capital is generally lower for securitizations. Pension funds–which could soon be subject to regulation based on Solvency II–may also have an incentive to move away from the securitization sector.
“Given that the insurance sector potentially represents more than 10% of the investor base, we expect that the regulation could cause securitization volumes to fall, while covered bond investment could rise,” said credit analyst Mark Boyce.
He added: “Solvency II regulation remains subject to change, and transitional periods could soften the blow on the insurance industry. The implementation date of the legislation could be delayed for another one or two years, and even then, insurers may have up to 10 years of additional breathing room
before having to implement the new capital adequacy rules. Still, some insurers have already begun to move away from investing in securitizations, and we expect this to continue if the final Solvency II rules closely resemble the current draft.”
