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June 23, 2017  

Regulatory Relief Seen for European Insurers

European Union regulators are considering market-friendly adjustments to their Solvency 2 initiative.

Word of the changes follow a May 30 compromise between the European Commission and the European Parliament that will afford more favorable capital-reserve treatment to most holders of securitized products deemed “simple, transparent and standardized.” It seems that the commission wants to see similar changes to Solvency 2, which separately governs the buying activities of insurers.

That measure took effect in January 2016, setting higher risk-weight floors for European insurers’ structured-product investments. Most of those institutions since have curtailed their purchases of asset-backed bonds, mortgage-backed bonds and collateralized loan obligations, citing uneconomical reserve requirements.

The timing of an alignment between Solvency 2 and the so-called STS measures remains murky. But sources said the commission, which championed the friendlier STS treatment amid pushback from Parliament, wants the process complete prior to that program’s scheduled implementation in July 2018.

Both Solvency 2 and STS mirror calculations for capital reserves under the Bank for International Settlements’ Basel 3 accord. The exact procedures under STS haven’t been written yet, but a source who saw a draft of the implementation plan said it’s likely that most asset- and mortgage-backed bond deals will qualify with only minor structural changes.

Nonperforming-mortgage paper probably won’t be considered simple and transparent, however. Nor will CLOs, reflecting a prohibition on deals with actively managed asset pools. “The devil is still in the details, but it looks like we will have a regulatory structure that allows for serious market pickup,” the source said.

The thought is that insurers would begin moving back into the market in late 2018 if Solvency 2 is modified to resemble the STS rules. Because Solvency 2 already is in place, meanwhile, those changes could require less jockeying than was involved in the development of STS — with the commission suggesting changes that Parliament would approve or veto without debate.

Insurers never have been huge structured-product buyers in Europe, but their absence has been noticeable as overall market activity has slowed this year. Industry players are concerned, in part, that some would become unfamiliar with those instruments if they stay away for an extended period. “One of the most important things about having the STS agreement is that it opens the door for the Solvency 2 review,” one trade-group representative said.

The Association of British Insurers is among several organizations supporting a less-stringent version of Solvency 2.