But holding bonds will still be less desirable than under current rules, says agency

European Commission proposals to lower capital charges for longer-dated unsecured corporate and financial institution bonds should mitigate the capital flight Solvency II is likely to cause from these asset classes.

Under the Commission’s proposal, charges are materially reduced for those bonds rated in the ‘A’ category or higher with duration over five years, and for ‘BBB’ bonds with 5-20 years’ duration.

Insurance companies are the largest investors in Europe, holding EUR 7trn of assets in total, equating to 44% of investment across the EU.

The previously proposed capital charges for long-dated unsecured bonds were extremely onerous, the agency commented, meaning that at best insurers were likely to switch holdings to shorter-dated higher rated bonds only - potentially increasing refinancing risk for borrowers.

But the changes represent incremental progress rather than a radical change, according to Fitch, which says holding these bonds would still be less desirable than under current rules.