The European Union is considering stricter rules for insurers participating in unfunded significant risk transfers (SRTs), a growing form of insurance for the banking sector. According to an expert opinion for the European Commission, insurers involved in these transactions should meet additional solvency criteria to ensure financial stability. The proposal comes as the EU seeks to finalize a legal package to boost securitized finance access, while avoiding a repeat of the 2008 AIG bailout.
Unfunded SRTs, unlike funded ones, leave banks exposed to the insurer’s ability to pay, introducing counterparty, legal, and liquidity risks. The note recommends requiring insurers to maintain solvency ratios above certain thresholds for three years, mandates at least two protection providers per transaction, and includes provisions for replacing downgraded insurers. Banking supervisors would assess concentration risks, and EIOPA and ESRB would evaluate systemic impacts.
SRTs typically insure junior loan portions with coupons exceeding 10%, while senior tranches are retained by lenders. The distinction between 'resilient' and non-resilient SRTs hinges on capital requirements for banks covering unexpected losses on senior tranches.
Source: Bloomberg Markets · Summarized by HeadlinesBriefing