EU Weighs Solvency II Capital Relief for Insurers’ Investments in Infrastructure

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The European Union is preparing reduced capital requirements for insurers in a bid to spur investment in long-term infrastructure projects.

The European Commission, the EU’s executive arm, is considering amending insurance rules known as the Solvency II Delegated Act to define an infrastructure asset class that would qualify for preferential capital treatment, according to an internal commission consultation document, dated Aug. 10 and seen by Bloomberg. This is part of EU efforts to kick-start the economy and integrate the bloc’s financial markets.

In the document, the commission says it would be “appropriate” to treat the largely unlisted equities held in European Long-Term Investment Funds in the same way as listed equities, implying a capital requirement of 39 percent, less than the 49 percent charge otherwise imposed on unlisted equities. This should “help tackle barriers to long-term investment in, for example, infrastructure projects,” according to the document.

“It is important to ensure that available funds flow to where they are most needed and that specific impediments to the financing of long-term investment projects are removed,” the commission said in the document. “Institutional investment by insurers, as long-term investors, plays a crucial role in supporting this.”

Insurers and pension funds hold assets of about 12 trillion euros ($13.5 trillion) “which can help to fund investment,” the commission said in its proposal on building a capital markets union. While some progress has been made in removing obstacles to long-term investments by these companies, “some have called for a tailored treatment of infrastructure investments, in relation to the calibration of the capital requirements of insurers and banks.”

Venture Capital

“Further work is needed to identify lower-risk infrastructure debt and/or equity investments, with a view to a possible review of prudential rules and the creation of infrastructure sub-classes,” the commission said.

The changed capital treatment for infrastructure investments would bring them into line with equities held in European Venture Capital Funds and European Social Entrepreneurship Funds, which are also mostly unlisted, according to the document.

While long-term infrastructure investments are riskier than alternatives such as buying top-rated government bonds, their returns are greater, and lower risk weightings could act as an incentive to invest in certain asset classes as insurers search for yield amid prolonged low interest rates. The commission may adopt the revised Delegated Act by the end of this month.

The commission document foresees a new infrastructure asset class based on a July 2 proposal from the European Insurance and Occupational Pensions Authority, which defines infrastructure assets as “physical structures, systems and networks that provide or support essential public services and are subject to limited competition,” according to the document.

‘Solid Basis’

“EIOPA’s draft advice provides a solid basis for the framing of the new asset class,”‘ the commission document states. “The commission’s services are now assessing if some refinement could be necessary.”

The document also contains a “shortened presentation” of EIOPA’s criteria for the infrastructure asset class, including that a project must be able to meet its obligations under “sustained, severely stressed conditions,” must generate predictable cash flows for both debt and equity investors and be governed by “a robust contractual framework including strong termination clauses.”

When investments are made as bonds or loans, the “infrastructure project entity” must supply a strong security package and unrated investments must possess “the highest level of seniority at all times,” according to the draft.

A European Commission spokeswoman declined to comment on the document.

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