Insurers to benefit from SIG asset opportunities following Solvency UK reforms, paper outlines

Written by Adam Cadle

05/03/2025

The recent Solvency UK reforms mean that insurers can benefit from any additional risk-adjusted spread available on sub-investment grade (SIG) assets, particularly for UK productive assets and investments that support the net-zero transition, a new paper launched by Hymans Roberton in partnership with L&G has outlined.

The so-called ‘BBB cliff-edge’ was a feature of the MA framework that disincentivised investment by annuity providers in SIG assets. The cliff-edge ensured that the MA benefit from SIG assets didn’t exceed the MA benefit that would arise on a BBB-rated asset with the same characteristics. This, and the fact that SIG assets will incur a higher capital charge than investment-grade (IG) equivalents, has contributed to MA firms largely avoiding SIG assets since the introduction of Solvency II in 2016.

“With the removal of the cap, MA firms should now be considering the opportunities that this brings,” the paper stated.

“In particular, how an allocation to lower rated assets can be complementary to their wider asset strategy, subject to compliance with the Prudent Peron Principle and regulatory guidance. This could include both SIG assets and increasing allocations to BBB/BBB- assets where the impact (related to the cliff-edge effect) of a future downgrade may have previously made investment unattractive.”

Hymans Robertson partner, insurance & financial services, Nicola Kenyon, added: “Insurers have been taking credit risk onto their balance sheet for a long time, and many firms have good policies, procedures, skillsets and systems in place to manage risks from IG credit.

“Insurers are well-placed to prudently invest in SIG assets, provided they evolve their approach to account for the nuances in SIG compared to IG credit.”

Related Articles