Italy adjusts SII rules amid coronavirus outbreak

Written by Adam Cadle

18/03/2020

Italy’s government has reduced the requirements for applying a country-specific volatility adjustment to strengthen Italian insurers’ regulatory Solvency II ratios.

The measure is part of a decree aimed at mitigating coronavirus pandemic-related effects, including economic contraction, materially slowing business activity, falling equity markets and interest rates and widening credit spreads. The adjustment reduces the risk that insurers’ Solvency II ratios would fall below 100% and also reduces the risk for the insurers’ subordinated bondholders.

Moody’s said: “Italian insurers have criticised current volatility adjustment rules, because it did not adequately reflect their asset allocation. They argued that the threshold for applying the country-specific adjustment resulted in cliff risk, whereby minimal differences in spreads determine whether the mechanism can be applied. Although the lower threshold at 85 basis points (bp) from 100 bp previously does not reduce cliff risk, it makes it more likely that the country-specific volatility adjustment can be applied.

“The application of a lower threshold will reduce Italian insurers’ sensitivity to movements in credit spreads, and therefore to spreads on Italian government bonds. Since the beginning of 2020, and increasingly so since the coronavirus pandemic, spreads between Italian and German government bonds have widened approximately 100 bp, considerably reducing the market value of Italian sovereign bonds and consequently Italian insurers’ own funds.”

Related Articles