Securitisations as an asset class for insurance companies 

Amending new solvency capital requirements for securitisations held by insurance companies

Following the publication of the delegated regulation (EU) 2018/1221 on 10 September 2018, which amended the delegated regulation (EU) 2015/35 (Solvency II regulation), the calculation of regulatory capital requirements for securitisations held by insurance and reinsurance companies is to be modified and the introduction of simple, transparent and standardised securitisations (STS securitisations) taken into account.

The change in the Solvency II regulations is a response to the revised European regulation for securitisations (regulation (EU) 2017/2402 “securitisation regulation”). In order to harmonise the securitisation market, these changes aim to standardise requirements for the entire financial services sector and, without any modifications to Solvency II, would lead to a double set of regulations in the way that securitisations for insurance and reinsurance companies are treated. The securitisation regulation and Solvency II regulation overlap where risk retention, due diligence and duties of disclosure are concerned so that these aspects will be taken out of the Solvency II regulation. Furthermore, definitions and references to definitions are aligned with the securitisation regulation in order to ensure clarity and coherency. In addition to eliminating areas that overlap, it’s the calculation of capital requirements for securitisations, which is specified in art. 178 of the Solvency II regulation, that is to be changed above all.
 

Previous method of calculating capital requirements for securitisations

In order to calculate capital requirements, the current Solvency II regulation divides securitisation positions into three categories, type 1, type 2 and resecuritisation positions and then calculates the capital requirement separately for each group.

A securitisation position is considered type 1 if it meets a list of 20 stringent criteria, which are listed in art. 177, section 2 of regulation (EU) 2015/35. The quality criteria include structural characteristics in particular: only positions with ratings of or better than BBB (credit rating 3) and only most senior tranches are considered for a type 1 classification.

A resecuritisation position exists if at least one of the underlying requirements is a securitisation position and the associated risk is divided into tranches again.

If a securitisation position doesn’t meet type 1 criteria or isn’t a resecuritisation position, it’s classified as a type 2.

The capital requirement for a securitisation position is calculated from its market value multiplied by a defined stress factor. The stress factor for the capital requirement depends on the duration in years, the credit rating and type allocated to the securitisation position.
 

Changes in the method of calculating capital requirements for (STS) securitisations

The purpose of recalibrating the solvency capital requirements is to provide the right stimuli for all types of securitisation investments and reflect risk sensitivity proportionate to the characteristics of the new STS securitisations introduced. Therefore, the stress factors were modified by replacing the previous catagorisation according to type 1, type 2 and resecuritisations and the quality criteria for type 1 with the new classification in senior STS, non-senior STS, non-STS and resecuritisations.

By allocating lower stress factors to senior STS securitisations, the new classification puts them in a better position than the previous type 1 securitisations. Ratings below a 3 and STS securitisations that are not most senior are now also allocate d relatively low stress factors. On the other hand, the non-STS securitisations are allocated the same values as the former type 2 securitisations.

This regulation is (alongside the securitisation regulation) to be applied from 1 January 2019. Appropriate transitional provisions have been provided for so that when the revised framework comes into force it won’t have any negative impact on already existing investments in securitisations. As a result, any securitisations issued before 1 January 2019 and classifed as type 1 securitisations will in future be treated as STS securitisations.

STS securitisations as an asset class for insurance companies

It remains to be seen whether the new capital requirements for senior STS securitisations will lead to changes in insurance companies’ investment behaviour, because even if a significant improvement regarding previous type 1 securitisations is achieved, lower risk factors still apply to investments in bonds or loans across all rating classes than to senior STS securitisations. The significantly higher capital requirements insurance companies need to meet compared with banks investing in securitisation positions remain – even if these are relativized. It’s also still extremely unlikely that anything will alter the unattractive status of investments in ABCP securitisations. While ABCP securitisations didn’t qualify as type 1 based on the previous Solvency II regulation, the new regulation would only be an improvement if the ABCP securitisation were to be STS compatible at a transaction and programme level, which, in terms of the latter, is thought to be very doubtful.