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A mechanism similar to the banking sector's Danish Compromise could reduce differences in regulatory capital treatment between banks and insurers holding stakes in financial institutions (FIs), Fitch Ratings said.
The mechanism is currently under consideration by European authorities as part of wider efforts to examine whether banks and insurance companies face a level playing field when participating in financial institutions. According to Fitch, more favourable capital treatment could encourage insurers seeking to strengthen their retail distribution networks to consider acquiring banks. However, such acquisitions could negatively affect an insurer's creditworthiness if they lead to lower available capital and a higher-risk business profile. Instead of acquisitions, existing financial conglomerate structures could also be adjusted to optimise capital management, although such changes could increase complexity and execution risks, Fitch said. The European Commission's review of the Solvency II prudential framework for insurance and reinsurance groups, which is set to take effect on January 30, 2027, does not currently introduce more favourable capital requirements for insurers with stakes in financial institutions. However, Fitch said the European Commission could propose a Delegated Act, potentially in 2027, to address differences in capital treatment between banks and insurers holding such investments. One possible change could allow insurers to treat significant stakes in banks as strategic participations for Solvency II capital treatment. This would enable them to apply the standard 22 per cent stress factor for participations while calculating the capital required for the investment. Fitch said the impact could be significant, with regulatory capital requirements against such investments potentially falling by nearly 80 per cent. The rating agency cited Unipol Assicurazioni S.p.A. as an example. The insurer reported a Solvency II ratio of 295 per cent at the end of the first quarter of 2026 for its insurance group, compared with 248 per cent on a group basis including its bank participation, highlighting the impact of the current capital treatment. However, Fitch cautioned that a higher Solvency II ratio alone would not necessarily translate into a stronger credit profile, as the impact would need to be assessed in the context of each insurer's specific circumstances. Under the Danish Compromise, regulators can allow banks to risk-weight stakes in insurance companies at 250 per cent instead of fully deducting such investments from available capital. Under Solvency II, insurers must currently deduct the Basel III capital requirements of banks they own from their own funds. (ANI)
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