Under the stringent capital treatment for crypto exposures being proposed by European insurance regulators, insurers’ crypto asset exposures are likely to remain minimal, says Fitch Ratings.
In a new report, the rating agency noted that the European Insurance and Occupational Pensions Authority (EIOPA) has recommended that the capital charge for crypto holdings be set at 100%, given the risk and volatility of crypto.
“The proposed 100% charge would be the highest applied to any asset class,” it said.
By comparison, equities face charges of between 22% and 49%, real estate investments are charged at 25%, and some private credit investments have “relatively modest charges,” Fitch reported.
Insurance regulators also concluded that there’s no diversification benefit to holding crypto, and that hedging of these exposures would not be recognized under the capital rules — which, Fitch said, would represent a “harsher treatment” than the one banks are facing under the approach being adopted by the Basel Committee on Banking Supervision.
“The high proposed charge would be a strong regulatory deterrent against material investment in crypto assets,” Fitch said, noting that it estimates that, “even a small allocation of less than 1% into crypto assets could lead to a double-digit fall in an insurer’s [capital] ratio…”
As a result, insurers are likely to maintain a “minimal” exposure to crypto, it noted.
Indeed, the companies themselves have shown “very little appetite” for cryptoassets, it said. “We believe this reflects insurers’ concerns about the extreme price fluctuations, market manipulation and security issues associated with cryptoassets.”