Insurers are facing a triple threat. Interest rates are low enough that insurers say banks are now muscling in on their home turf of long end lending — although strangely, given how long rates have been low, only for the last three or four months.
Second, the same insurers are about to receive a big disincentive, in the form of Solvency II, to invest in things that fit their liabilities, like securitizations. These assets can have legal maturities (but not actual maturities) that can extend to 50 years. Ideal you might think, but Solvency II says they are virtually a no-go.
Lastly, comes regulatory approval. Although the Bank of England has approved 19 UK insurers’ models for calculating their Solvency II ratios (using a standardised version is the alternative), securitization market players say it hasn’t helped demand, being something of a black box in terms of the transparency of the approval process. Many insurers have backed out of the securitization market altogether, and some have been selling off their assets.
Regulators must ensure the varying regimes for different types of institutions interact in a balanced way, and soon. This is critical given how central securitization is seen as being to Europe’s economic growth. By the time Solvency II is reviewed again — maybe in a year or two — many of today’s securitization investors will be buying other things.