Solvency II is set to transform how insurers invest their assets with important ramifications for Europe’s debt markets, according to Fitch.
European insurers are the largest investors in the European financial markets, holding EUR6.7trn of assets including more than EUR3trn of government and corporate debt.
The rating agency said the new directive means that insurers' asset allocations will be heavily influenced by Solvency II capital charges reflecting the price volatility of each asset class - a fundamental change from current asset allocations, which are driven by expected long-term investment returns..
Fitch's Insurance team director Clara Hughes said: "If the current Solvency II proposals were fully implemented on 1 January 2013, insurers would be expected to carry out significant changes to asset portfolios to optimise their capital position under the new rules.”
"This would have ramifications for certain segments of the European debt markets. The main impacts would be a shift from long-term to shorter-term debt; an increase in the attractiveness of higher-rated corporate debt and government bonds; diversification of large asset holdings; an increase in the attractiveness of covered bonds; a preference for assets based on the long-term swap rate and a shift from short-dated paper to deposits."
However, Fitch considers it unlikely that large-scale reallocations will happen in the short term as transitional arrangements are likely to phase in implementation of Solvency II over several years.
Hughes said: "Transitional arrangement may give insurers up to ten years to adapt their business and investment strategies to the new regime," "The calibration of Solvency II is still under discussion, so the capital charges for asset risk and price volatility may not be as onerous as the current draft, mitigating the impact on investment markets."
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