According to a new report published by Standard & Poor's Ratings Services, the latest changes to the draft Solvency II standards (released in December 2013) will likely do little to prevent many European insurers turning away from securitization investments, despite representing a positive development compared with the previous proposals.
The report titled "EIOPA's Revised Solvency II Calibration Still Risks Turning European Insurers Away From Securitizations" highlights that European insurers' securitization investments that meet certain structural, asset-level, and transparency requirements are eligible for more favourable capital treatment than under the previous draft calibration in December 2012.
The updated proposal defines certain securitizations as "Type A" exposures, and treats these more favourably than other securitizations (termed "Type B").
"We believe the revised proposals point to a growing recognition among European policymakers that not all securitizations are created alike, and specifically that the poor credit performance of many transactions linked to the US sub-prime mortgage market was the exception, rather than the rule. Most European securitization asset classes have shown strong credit performance over the six years or so since the US sub-prime issues came to light," said credit analyst Mark Boyce.
He continued "Even so, standardized capital charges in the proposed rules remain high when compared with other asset classes. For example, five-year 'AAA'-rated covered bonds and corporate bonds are subject to spread risk capital charges between 3% and 5%-five to six times lower than for Type A securitizations. The securitization capital requirements for European insurers under the proposed Solvency II rules are also more than 10 times higher in some cases than those for global banks under the most recently-proposed revisions to the Basel securitization framework.
Questions also remain over how significant a share of future European securitization issuance would qualify for Type A treatment under the rules, without material changes to current market practices. And it's unclear to us how insurers will verify securitizations' compliance with some of the Type A criteria in practice.
There's still scope for amendments to the Solvency II standards. However, while we believe that the December 2013 calibration changes imply greater policymaker support for the European securitization market, we anticipate that unless capital requirements fall further, many insurers would shun securitization investments."
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