Solvency II regulation will change European insurers’ demand for different asset classes.
The capital markets may be in for a big shock come January 1, 2013. That’s when the EU’s Solvency II insurance industry regulations come into effect.
While there has been talk of delaying enforcement another year (there are questions as to whether some countries and regulators are prepared, as well as surrounding the preparedness of the insurance industry itself) the new rules will force insurers to report their assets and liabilities at market value, and to hold capital against short-term volatility in the value of assets. This will make some securities much less attractive to this investor base. Treasurers teeing up securities offerings should take note (see related story here).
European insurers hold €6.7tn in assets, including more than €3tn in debt, according to ratings agency Fitch. The change could be significant for issuers, especially those in the lower regions of the credit spectrum.
“Fitch expects a shift from long-term to shorter-term debt; an increase in the attractiveness of higher-rated corporate debt and government bonds, and shift away from equity; and a preference for assets based on the long-term swap rate,” the firm wrote in a recent analysis, Solvency II Set to Reshape Asset Allocation and Capital Markets.
While the eventual effects of the shift are not yet clear, the reallocation of such a large amount of capital could have a profound effect, widening the difference between the cost of high-grade and high-yield debt, and increasing the cost of equity, for example.