The European Insurance and Occupational Pensions Authority (EIOPA) has published its “Discussion Paper on Infrastructure Investments by Insurers”. At 24 pages, the paper’s shorter than expected. It also raises more questions than it answers, and gives fewer answers than we thought it would (see our earlier blogs, which are here and here). What the paper does most clearly, however, is draw our attention to how complicated the issues are, and how little time there is left to resolve them.
The paper begins with a description of the entry criteria into the infrastructure category that EIOPA is proposing to use: EIOPA wants “to focus the analysis of infrastructure investments on the most promising segments, which have to meet at least the following criteria: [a] the segment is an attractive investment prospect for insurers[; and b] there are indications that a more granular treatment is warranted“. So: “Which infrastructure investments … have a different risk profile than implied by the standard formula treatment and what is the evidence?”; and “How relevant is liquidity for infrastructure investments by insurers“?
Because EIOPA has been asked to advise the Commission about the possibility of a specific standard formula treatment for infrastructure investments, it probably needs to define “infrastructure investments“. So it describes three different ways in which it could create and scope the definition, before asking whether a definition is required; and, if it is, which approach will work best, and what. EIOPA also asks whether there are any existing definitions of (eg) “project finance“, and “infrastructure” it should take into account, in addition to those in Basel II and the Capital Requirements Regulation (which, it implies, might do). Having done this, EIOPA goes on to consider whether, and if so how, the definition should reflect the political, construction, revenue, financial structure, and operational risks that might affect an infrastructure investment, and whether there are any other important criteria that ought to be taken into account.
In its report on long-term investments, EIOPA came to the conclusion that “a new calibration of the capital requirements for infrastructure investments within the standard formula could not be recommended [because of] a lack of data [and because] where data was available … it did not ‘fit’ with the structure of the standard formula“. These issues would have to be resolved before a more granular calibration for infrastructure investments could be considered. So, EIOPA is considering whether a partial internal model might help. It’s also considering whether equity infrastructure investments should be regarded as “type 1”, “type 2” or (a new category of) “type 3 equity”; and for debt infrastructure investments, it’s investigating whether there should be a specific spread-risk charge, with a reduction for hold to maturity.
Because few insurers have infrastructure investment experience, and these investments are often complex and illiquid, EIOPA is considering whether specific risk management requirements should be created and imposed; and whether Commission Delegated Acts are the best way to specify how the risks should be identified, measured, monitored and managed.
FInally, EIOPA is considering whether it should restrict infrastructure investments by insurers so that (eg) insurers only invest if they can be satisfied that the infrastructure project manager will report to the insurer every quarter; whether that information should be provided in a standard form; and whether infrastructure investment contracts should include standard terms. If these criteria are not met, the investing insurer would not be able to treat its investment in the relevant infrastructure project as an investment that qualifies for the benefits of a special treatment under Solvency II (if that’s what they are).
EIOPA has asked for comments on its Discussion Paper, and answers to its questions, by e-mail by 26 April 2015. 26 April is a Sunday (EIOPA is so flat-out, it’s working Sundays now too). It’s also only 18 (non-EIOPA) working days after the Discussion Paper was published – which just goes to show how tight time really is.