(Clarifies that EIOPA's report in December to ease capital charges is a proposal and is not yet applicable)
By Joshua Franklin
LONDON, March 19 (IFR) - Insurance companies could be discouraged from investing in the securitisation market if proposed European capital charges do not treat them the same as other fixed income assets, Standard & Poor's said on Wednesday.
In December, the European Insurance and Occupational Pensions Authority (EIOPA) proposed to ease some of the capital charges under Solvency II for insurers' securitisation holdings - including mortgage backed securities. This included reducing the floor for capital charges incurred for holding Triple A rated securitised paper to 4.3% from 7%.
However, S&P said the decision to classify securitisation investments as riskier than some other fixed income assets such as covered bonds could harm insurers' appetite for the financial product.
"While we believe that the December 2013 calibration changes imply greater policymaker support for the European securitisation market, we anticipate that unless capital requirements fall further, many insurers would shun securitisation investments," analysts at the ratings agency wrote in a report.
The EIOPA rules classify investments into safer Type A assets and riskier Type B investments. However, the S&P report said it was unclear what proportion of future European securitisation issuance would be classified as Type A because certain practices, such as back-up servicing agreements, were not common in securitisation.
S&P said this raised questions about other arrangements qualified as provisions to ensure servicing continuity in the event of servicer default - one of the requirements for Type A classification. The agency also said it was unsure how insurers could be sure securitised paper complied with the Type A criteria.
The goal of the updated EIOPA rules is to better protect investors during a crisis, but have been criticised for being calibrated using the experience of the collapse of the US subprime mortgage market.
The authors said the looser restrictions published in December shows regulators are beginning to appreciate the crisis in the United States "was the exception, rather than the rule" with only 1.5% of European structured finance having defaulted, according the agency.
"The revised proposals point to a growing recognition among European policymakers that not all securitisations are created alike", they wrote.
(Reporting by Joshua Franklin; Editing by Anil Mayre)
((joshua.franklin@thomsonreuters.com)(+44207 542 0331)(Reuters Messaging: joshua.franklin.thomsonreuters.com@reuters.net))
Keywords: SECURITISATION SOLVENCY II
