S&P report says Solvency II could deter insurers from securitisations

10 December 2012

Relatively high capital charges for securitisations under the new Solvency II European insurance rules could lead European insurers to reduce exposure to the asset class dramatically and invest in covered bonds instead, according to a report published today by Standard & Poor's Ratings Services.

The report titled "Solvency II Could Push European Insurers Away From Securitisations," highlights how the capital charges for senior securitisations 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 securitisations. Pension funds--which could soon be subject to regulation based on Solvency II--may also have an incentive to move away from the securitisation sector.

"Given that the insurance sector potentially represents more than 10 per cent of the investor base, we expect that the regulation could cause securitisation 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 securitisations, and we expect this to continue if the final Solvency II rules closely resemble the current draft."

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