The secured credit reset? What insurers can expect

European insurers are entering a pivotal phase of regulatory reform, with proposals expected to enhance the treatment of securitisation and support a more proportionate prudential framework. While the overall direction is encouraging, the extent of the benefit is likely to vary across Europe, reflecting country‑specific nuances and differing reliance on the standard formula approach.

In this article, we outline how the proposed changes will likely impact the relative appeal of asset backed securities (ABS), while recognising the ongoing structural challenges that could lead some insurers to consider other areas of the secured credit market.

European insurers are facing a shift in the securitisation landscape

The European Commission’s proposed changes to Solvency II introduce a more risk-sensitive calibration for securitisation exposures. These amendments are intended to reduce longstanding inconsistencies in how securitised assets are treated relative to other fixed income instruments, particularly at the highest levels of credit enhancement.

In brief, the key proposals cover the following:

More competitive capital for senior risk

The recalibration explicitly seeks to bring senior Simple, Transparent & Standardised (STS) tranches closer to covered bonds in capital terms, a shift that enhances their relative value within high‑quality fixed income buckets. For non‑STS transactions, the introduction of a separate capital charge curve for senior tranches acknowledges their lower credit risk relative to mezzanine and junior layers, addressing a long‑standing bluntness in the framework. Together these changes make senior securitisations more investable for standard‑formula users without compromising prudential safeguards.

Largest relative gains for senior non‑STS

Non‑STS senior tranches, notably AAA collateralised loan obligations (CLOs), are positioned as the biggest beneficiaries. The sharper reduction in capital intensity for these senior non‑STS exposures materially improves their relative value though these exposures remain more capital intensive than equivalently rated corporate bonds (See Figure 1). 

Figure 1: Standard Formula Approach - Today vs. Proposed

Source: Commission Delegated Regulation (EU) 2015/35, European Commission draft amendment October 29, 2025. For illustrative purposes only. 

The chart highlights the current one-year spread charges (solid lines) versus that proposed (dotted, but same colour for the different bond securitisations) relative to that of covered and vanilla corporate bonds.

Improved cross‑regulatory consistency

The revised hierarchy of charges better mirrors the senior/mezzanine distinction used in the bank rulebook (Capital Requirements Regulations/Capital Requirements Directive). Greater alignment across prudential frameworks should support more stable demand from both banks and insurers, improving the reliability of primary market sponsorship.

Macro policy intent supports issuance

The reforms are designed to revitalise European securitisation as a conduit of funding to the real economy, aligning with broader goals to channel private capital into growth, green and digital priorities. Over time, this should help sustain issuance across RMBS, consumer ABS, auto, SME and CLO markets, provided relative value remains compelling. 

Overall, we think the package of proposals around capital, proportionality and usability will create a much healthier European ABS market; however, while the overall direction of travel is positive for insurers, the impact is not uniform.

Overall, we think the package of proposals around capital, proportionality and usability will create a much healthier European ABS market; however, while the overall direction of travel is positive for insurers, the impact is not uniform.

Internal model vs. standard formula: differing outcomes

There’s limited change for those insurers with approved internal models that already have securitisation exposures because their capital methodologies already incorporate a more detailed understanding of the risk profile of the structures, and consequently a lower capital charge. However, recognising that the proposed changes narrow the gap between internal model outputs and the revised standard formula charges, those internal model insurers with modest to no securitisation exposures can now proceed with greater confidence of approach (investing as well as modelling), particularly for the most highly protected exposures.

For standard formula users, we think the benefits of the proposed changes are more selective. The revised calibration strengthens the relative position of the most protected STS tranches, reducing one of the longstanding disadvantages that securitisations have held over covered bonds and other high quality fixed income assets. However, outside this narrow part of the market, securitisation exposures – particularly non-STS and lower protection tranches – continue to attract higher capital charges than corporate bonds with similar ratings.

In addition to capital considerations, the due diligence framework still presents a headwind if EU Securitisation Regulation continues to place legal responsibility for due diligence on insurers even when operational duties are delegated. In our view, any obligation to verify risk retention and transparency requirements, independently of delegated oversight, will continue to pose governance challenges, particularly for smaller and medium-sized firms. An approach that permits expert due diligence from an investment manager offers a more appropriate compromise.

How does this impact UK insurers?

For UK insurers, the implications are less clearcut. The UK has not adopted the same capital recalibration as the EU. Instead, recent reforms have focused on creating a more principles-based regime, with simplifications in due diligence processes and adjustments to other aspects of Solvency UK. These changes may reduce operational complexity, but they do not introduce a material shift in the capital treatment of securitised assets. As such, many of the same considerations that apply to standard formula users in the EU, particularly around capital intensity and governance, continue to influence UK insurers’ investment decisions. Further changes may follow, but the direction is still evolving.

The case for Asset-Based Financing

Although the proposed Solvency II amendments represent a constructive evolution in the treatment of securitisation, they do not eliminate all the barriers that have limited insurer participation. This is why we think Asset‑Based Financing (ABF) remains an important complementary route into secured credit.

ABF refers to private, bilateral lending structures secured against specific pools of assets, such as mortgages, consumer loans or equipment finance. These transactions are assessed under insurers’ existing credit risk frameworks, where capital charges scale with credit quality and duration in a more predictable way. This avoids the tranche-specific stress factors applied to public ABS and can create a clearer link between expected loss, duration and capital requirements. ABF structures also allow greater control over collateral, reporting and structural features, which can be particularly valuable for insurers with specific risk, governance or portfolio requirements.

However, liquidity is an important distinction when considering ABF. Public securitisations benefit from secondary market trading and transparent pricing, whereas ABF arrangements are typically buy and maintain exposures. For insurers that require flexibility to rebalance portfolios or meet changing liquidity needs, this limits the extent to which ABF can be used. For others – especially those with long-term buy and maintain strategies – these characteristics are less constraining, and the alignment between capital, risk and return may be more favourable.

Looking ahead

The proposed Solvency II reforms represent a constructive evolution toward a more proportionate and risk‑sensitive treatment of securitisation, enhancing the role of senior STS and non-STS within the fixed income allocations of insurers. At the same time, ABF provides a complementary route into secured credit, particularly for those insurers seeking more predictable capital treatment and greater structural governance that can accommodate the illiquidity and complexity of the asset class.

While we expect the impact of the reforms will vary by insurer, the overall direction of travel is encouraging, and the additional flexibility marks a positive development for the European insurance market.

For professional investors only. This material is not suitable for a retail audience. Capital at risk. This is a financial promotion and is not investment advice. Past performance is not a guide to future performance. The value of investments and any income from them may go down as well as up and is not guaranteed. Investors may not get back the amount invested. The views expressed are those of the authors at the date of publication unless otherwise indicated, which are subject to change, and is not investment advice.