Europe's Solvency II regime will transform the way insurers decide their asset allocation when the regulation comes into force on 1 January 2013, says ratings agency Fitch Ratings.
The new rules are designed to protect consumers by forcing insurers to protect themselves from insolvency.
Insurers will be required to state the market value of their assets and liabilities when determining their solvency position. They will also have to hold explicit capital to compensate for short-term volatility in these values.
Fitch says the regulation will make insurers more likely to choose short-term rather than long-term debt, and higher-rated bonds rather than lower-rated ones. They will also buy more covered bonds and begin to choose assets based on the long-term swap rate, it said.
The ratings agency also said insurers will also pursue more downside protection and use derivatives such as swaps and floors for duration-matching.
European insurers are the largest investors in Europe's financial markets with €6.7trn of assets.
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