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A third (33 per cent) of insurers polled said the new rules would stop investment altogether, with the remaining two-thirds (67 per cent) saying they would dramatically reduce allocation of funds to the securitisation sector.
In late 2011, the European Commission proposed Solvency II capital charges of 7 per cent of market value per year of duration on AAA-rated securitisations held by insurance companies, compared with 0.9 per cent for corporates and 0.7 per cent for covered bonds. Significantly, more than one in five insurers (22 per cent) who stated that they would withdraw from the securitisation market now if the proposed rules were enacted, said they would never return - even if the capital charges were in future reduced to levels more comparable to those of corporates and covered bonds. Of those who would return, 63 per cent said that any return would take more than one year, with almost a fifth saying it would take three years or more.
Moreover, the proposed capital charges have been calibrated using a flawed methodology by including historic and largely US-sourced bonds that are no longer issued and would be prohibited anyway for investment by European insurers. The charges, therefore, not only fail to reflect the economic risks of permitted investments, they also fail to distinguish between different types of risk. Furthermore, they have not been consistently applied across all asset classes.