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The Actuary The magazine of the Institute & Faculty of Actuaries

Solvency II dampening demand for corporate debt say European investors

Nearly half of European fixed income investors expect Solvency II to have a negative impact on the demand for corporate debt, a Fitch Ratings survey has revealed.

"46% expect the consequences of forthcoming insurance regulatory changes on the demand for long-term fixed income assets issued by corporates to be negative," said Monica Insoll, managing director in Fitch’s Credit Market Research group. "A similar proportion (42%) thought there would be no real impact and 12% believed Solvency II would be a positive for the asset class."

Respondents to the quarterly survey, which represents the views of managers of an estimated USD4trn of fixed income assets, were more optimistic on the impact on sovereign debt but responses were evenly split, with 28%anticipating positive and negative impacts respectively.

"Solvency II brings in explicit capital charges on assets for all European insurers for the first time," says Clara Hughes, director in Fitch’s EMEA Insurance rating team. "European Economic Area sovereign debt is currently proposed as one of the few asset classes to be exempt from direct charges."

"The regulations will require insurers to consider short-term risk in the form of a one year Value at Risk. This is a completely new perspective for many insurers that have been accustomed to a buy and hold philosophy," says Aymeric Poizot, head of Fitch’s EMEA Fund and Asset Manager rating group.

"For example, from a Solvency II standpoint, high grade long-term corporate credit is no longer a low risk carry investment and could be less favoured. Consequently products providing long-term guarantees that were profitable under Solvency I may no longer be viable under Solvency II."

The survey was conducted between 31 March and 2 May. Fitch will publish the full survey results in a report in the coming weeks.