High capital charges for securitizations under the new Solvency II directive could lead European insurers to dramatically reduce exposure to the asset class and invest in covered bonds instead, Standard & Poor’s said in research published this week.

In October 2012, the European Insurance and Occupational Pensions Authority (EIOPA) released the latest draft technical specifications for Solvency II, the upcoming regulatory overhaul of the European insurance industry. Capital charges for senior securitizations under the draft Solvency II rules' standard formula is up to 10 times higher than those for similarly-rated covered bonds, meaning that return on capital is generally lower for securitizations.

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