European life insurers hold the potential to bolster competitiveness, yet the question remains whether they will be entrusted with the necessary keys to unlock this potential.
The European Commission has proposed a series of reforms aimed at encouraging life insurers to participate more actively in debt securitisation markets. These regulatory proposals, designed to relax existing prudential and capital requirements, seek to make such investments more attractive for insurers.
Incentivizing Insurer Investment
The key focus of these proposals is to remove unnecessary prudential costs for insurers investing in securitizations. By doing so, the European Commission hopes to make these investments more appealing. Additionally, the Commission aims to recognize unfunded credit protection provided by (re)insurance undertakings as eligible protection under the Simple, Transparent, and Standardized (STS) securitisation framework. This move would expand the roles of insurers beyond those traditionally filled by banking sector providers.
Eligibility Criteria and Challenges
However, these measures come with certain challenges. For instance, meeting stringent eligibility and risk management criteria, such as Solvency II compliance and internal model approval for capital requirements, may be demanding for some insurers. There is also uncertainty about the full impact of these regulatory adjustments on reviving EU securitisation markets, with some stakeholders unsure if these changes will substantially increase insurer participation.
Enhancing European Competitiveness
The proposed reforms are intended to strengthen EU banks' and insurers’ capacity to support lending through securitisation, thereby boosting financing availability for key EU strategic priorities, including defense. By broadening the investor base for securitized debt in Europe, these reforms could enhance market depth and resilience compared to current limited insurer engagement.
Moreover, these reforms aim to help the EU securitisation market better compete with global counterparts by reducing perceived overcapitalization and improving risk sensitivity and transparency. This could make EU securitisations more attractive to investors.
The Road Ahead
In summary, the regulatory proposals aim to facilitate increased insurer engagement in securitisation, including life insurers, by easing capital charges and broadening eligibility. However, challenges remain in meeting regulatory eligibility criteria and in ensuring the reforms fully stimulate insurer activity in practice. The final technical regulatory standards are expected by October 2025, which will further clarify the regulatory landscape.
These reforms are part of a broader effort to ignite the engines of growth in Europe, particularly in the wake of volatile markets in early 2025. The lack of participation by life insurers in the EU securitisation market is due to regulatory constraints on insurer participation, not scale. The complexity of securitisation demands more sophisticated risk management capabilities from insurers, but these reforms aim to ease this burden.
References:
- European Commission (2021). Commission Proposes to Facilitate Investment of Insurers in Securitisations
- European Commission (2022). Proposal for a Regulation of the European Parliament and of the Council on the prudential requirements for credit institutions and investment firms
- European Commission (2023). Consultation on draft delegated act amending Solvency II regulations to lower the prudential requirements attached to investments on insurers' balance sheets
- European Commission (2024). Final technical regulatory standards expected by October 2025
- Recognizing unfunded credit protection provided by insurance undertakings as eligible under the STS securitization framework, as part of the proposed reforms, could help expand the roles of insurers beyond traditional banking sector provisions.
- To encourage life insurers' participation in debt securitization markets, the European Commission has proposed easing regulatory requirements, including lowering prudential costs, which aims to make these investments more appealing for insurers.
