provide a more favourable treatment of these securities given that they are able to model securities using observable prices rather than using the standard model factor-based approach. However each internal model and approach will need regulatory approval.
An overarching requirement for securitisations is the retention requirement
where the originator, sponsor or original lender shall retain a material net economic interest in the deal of no less than 5 percent. The retention rule is deemed a requirement for all securitisations held by insurance entities.
We note that the language used around risk retention is particularly strong in the EC documentation. The documentation also states that continued failure to comply with this particular regulation could result in what governance and in turn could be subject to imposed capital add-ons.
Finally, the adoption of any new regulatory regime is always going
underestimated by insurers wishing to invest in securitisations. Sourcing the deal level data needed to distinguish between Type 1 and Type 2 is one matter and the ongoing surveillance with respect to the risk retention is another.
CONCLUSION
For insurance companies which are subject to Solvency II, investing in securitisations remains a ‘work in progress’ for the moment. Additional capital treatment of securitisation deals, the market will likely become more complex and fragmented over the coming period.
EIOPA has set the bar high with regard to the regulatory requirements
of insurance companies that wish to make investments in securitisations. that many may struggle to succeed. Furthermore, with the prospect of imposed capital add-ons by the supervisor, investors will need to carefully
It remains unclear at this point whether investing in ABS represents an do believe the market and regulation are moving in the right direction.
John Loughrey is a senior research analyst at GR-NEAM. He can be contacted at:
john.loughrey@grneam.com
Originally published by GR-NEAM in February 2015
Management, Inc and its subsidiaries are not registered or authorized to conduct business.
SUMMARY
• While EIOPA has recently reduced the capital risk charges associated with Type I securitisations, they remain punitive relative to similarly rated corporate bonds.
• Risk retention requirements and the ability to document compliance with risk retention rules remain a barrier to investing in the ABS sector.
• At this point, while there may be some relative value in certain ABS, more clarity and possibly more capital relief will be required to justify participation in the ABS sector by insurance companies subject to Solvency II.
FIGURE 2: SPREAD RISK FACTOR BY CREDIT QUALITY STEP: STANDARD MODEL 100
10 20 30 40 50 60 70 80 90
0
5Yr Corporate Bond Secr Type 1 Secr Type 2
0.9% 2.10% 12.50%
0123456 1.1% 3%
1.4% 3%
13.40% Source: European Commission and GR-NEAM 16.60%
2.5% 3%
19.70% Credit quality step 4.5% 82% 7.5% 100% 7.5% 100%
Spring 2015 | INTELLIGENT INSURER | 37
% charge per year of duration
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