Italian insures would be hit worst by the end of the 0% capital charge on sovereign debt in Solvency II, Fitch has said in statement.
This comes after Gabriel Bernardino, chairman of the European Insurance and Occupational Pensions Authority (Eiopa), unveiled plans last week to extend to standard formula firms an internal model requirement to risk weight sovereign bond portfolios (InsuranceERM, 18 November, Eiopa to rethink 0% capital charge on sovereign bonds)
In a statement, Fitch said Italian insurers, or those with large Italian subsidiaries, would be most exposed to this change, because they have large holdings of Italian sovereign debt.
"Italy's BBB+/Stable sovereign rating is lower than that of most other major European countries and would probably lead to a higher risk-weighting, increasing any capital charge for holding its debt," the rating agency added.
Among the largest European insurers Generali, Aviva and Allianz stand out as those with the most material exposure to Italian sovereign debt, but they are likely to use an internal model, which means that they will apply a risk charge to sovereign bonds holdings from January.
The change in the rules would have a smaller impact on Spanish insurers – the other sovereign with a BBB+ rating – because of the relatively small size of the Spanish life insurance sector, which typically builds the largest sovereign debt exposures.
The addition of a sovereign risk submodule is expected to be done in parallel with changes in the regulation for other financial institutions, including banks. The charges will likely be lower than the equivalent charges for corporate debt and will be calibrated to discourage concentration on debt issued by a single sovereign.
Earlier this year, the European Systemic Risk Board estimated in a report that if sovereign bonds attracted the same charges as corporate bonds under the standard formula, the industry would need to hold an additional €80bn ($86bn). In three countries the report estimated the average solvency capital requirement would increase by more than 150% (InsuranceERM, 23 March, Risk-weighting sovereign bonds would add €80bn to EU insurers' capital).
The treatment of sovereign debt was a sticking point in the solvency negotiations at the height of the euro crisis. Although there is a wide consensus that sovereign holdings are not risk free, a political agreement on the capital charge for these investments is likely to take a long time to craft.
Fitch warned that national supervisors could anticipate the changes to prevent regulatory arbitrage between the use of internal models and the standard formula, by imposing capital add-ons on standard formula insurers where they believe sovereign risk is material.