The European Commission has called for EIOPA’s technical advice about investments in infrastructure projects by insurers.

As the European Commissioner, Jonathan Faul, explains in his covering letter, “The Solvency II standard formula sets out calibrations for risk charges on equity and debt investment, but these calibrations do not account for the specific nature of infrastructure investment. The Commission has set the objective of establishing a well regulated and integrated Capital Markets Union  … with the view to maximising the benefits of capital markets and non-bank financial institutions for the real economy … it is important to ensure that available funds flow to where they are most needed, and specific impediments to long-term investment are removed. Infrastructure is one specific area where it should be ensured that European legislation does not present unjustified obstacles to institutional investors like insurers, as it creates tangible long-term value. I would [therefore] like to ask EIOPA to explore to what extent it can advise on refinements to the Solvency II Delegated Regulation that serve this goal.

In particular, the Commission’s call for advice includes a request:

  • For “one or several … definitions of debt and equity infrastructure investment that could be used to specify new risk categories in the … standard formula. These definitions should [include] investments in infrastructure that offer predictable long-term cash-flows and may include qualitative criteria that ensure standardisation and transparency of infrastructure investment. These definitions should not include investments whose risks cannot be properly identified, managed and monitored by insurers”;
  • For the new categories to be calibrated in a way that’s in line with the 99.5% VAR measure used in the Solency II Directive;
  • For a view on how the new categories could fit within the market and counter-party risks modules in the standard formula, or whether new sub-modules for infrastructure investments need to recreated; and
  • For a list of potential obstacles to infrastructure investment that already sit within the Delegated Regulation, that are not prudentially justified, and could be addressed at this stage.

EIOPA has established a dedicated web page, which will be used to give more information about its work in this area.

A small roundtable discussion has already taken place. EIOPA is expecting to publish a consultation paper in April 2015, before preparing and submitting its technical advice to the Commission by 30 June 2015.

Although EIOPA has responded positively and graciously to this request from the new Commissioner, and it’s undoubtedly a positive development, it must also be slightly frustrating, given that the Delegated Regulation was only made on 10 October 2014. Fortunately, there should still be time to identify the necessary changes and make them before Solvency II begins to apply to (re)insurers on 1 January 2016.

Posted by Cooley