Fitch Ratings expects EU insurers to maintain minimal exposure to crypto assets if the European Commission adopts a proposed 100% Solvency II (S2) risk charge for these holdings.
The European Insurance and Occupational Pensions Authority (EIOPA) recently recommended this high capital requirement due to the volatility and risks tied to crypto assets.
EIOPA, responding to a request from the European Commission, aims to promote cautious treatment of crypto assets under the S2 framework.
Since S2 does not clearly classify crypto assets, they are typically categorized as intangibles or Type 2 equities, which are equities not listed on regulated EEA or OECD markets.
Insurers may also face indirect exposure to crypto through bonds or equities linked to companies involved in crypto-related activities or holding crypto as treasury assets, adding further risk.
The proposed 100% charge would strongly discourage significant investment in crypto assets. EIOPA recommends that no diversification benefit be applied due to insufficient supporting data.
Crypto holdings would fall under the intangibles module of the standard formula, meaning hedging strategies would not reduce capital charges, but Central Banks’ Stance on Bitcoin, according to Beinsure data.
The gross position would be fully charged, representing stricter treatment than current banking regulations under the Basel Committee on Banking Supervision.
Fitch estimates that even an allocation of less than 1% to crypto could cause a double-digit decline in an insurer’s S2 ratio, depending on the risk charge applied to the asset class being replaced.
EU insurers already show limited interest in crypto assets. EIOPA data reports direct exposure at just 0.0068% of sector assets at the end of 2023.
This low level likely reflects concerns about extreme price swings, market manipulation, and security risks.
More than 90% of this exposure is concentrated in Luxembourg and Sweden, primarily through funds such as exchange-traded funds, held for unit-linked policyholders.
In these cases, the policyholders bear the market risk, leaving insurers’ S2 ratios unaffected.
The proposed 100% charge would be the highest capital requirement for any asset class under the S2 standard formula market risk framework.
Major crypto assets like Bitcoin and Ethereum have shown significant volatility, justifying the proposed rate.
In comparison, equities face charges between 22% and 49%, with adjustments based on market conditions to limit pro-cyclicality.
Property investments carry a 25% charge, while some private credit assets have lower charges. For example, mortgage loans with a loan-to-value ratio under 60% are subject only to counterparty credit risk under S2, with no market risk charge.
SEC announced the creation of a task force in the U.S. focused on establishing a comprehensive regulatory framework for crypto assets.
The Crypto Task Force will help to draw clear regulatory lines, appropriately distinguish securities from non-securities, craft tailored disclosure frameworks, provide realistic paths to registration for both crypto assets and market intermediaries, ensure that investors have the information necessary to make investment decisions, and make sure that enforcement resources are deployed judiciously.
The task force will bring together agency experts to collaborate with SEC staff and the public in shaping a regulatory approach that aligns with existing laws. Until now, the SEC has primarily relied on enforcement actions, often applying novel legal interpretations retroactively.
