Laying the foundations for infrastructure
Following substantial political pressure, the European Commission has rushed through reduced capital charges under the standard formula for certain investments, including a new infrastructure asset class. The reductions are a positive step, but do they go far enough to encourage the investment the EU is hoping for?
EIOPA is a having a busy year. With the juggernaut that is Solvency II creeping ever closer to implementation, those hard working chaps in Frankfurt have found time to work on an amendment to the SII Delegated Act, reducing capital charges for certain investments.
The amendment includes:
- introduction of an infrastructure asset class for debt or equity that meet the qualifying criteria
- European Long-Term Investment Funds (ELTIFs) to be treated as Type 1 equities
- equivalent treatment for equities traded on multilateral trading facilities (meaning they can be classified as Type 1)
- extension of equity transitional measure to Type 2 equities
- fixing drafting/typographical errors
The new infrastructure asset class has grabbed most of the headlines in recent months, and not all of it has been positive. However, the finalised credit spread capital charges are lower than those initially tabled and the equity risk parameter is at the bottom of the range given in the consultation paper.
The infrastructure debt charges result in a pre-diversification capital saving of around 30% for rated assets compared to conventional bonds/loans. Unrated assets (which meet the infrastructure criteria) receive a bigger boost with savings of up to 44%.
Looking at infrastructure equity holdings, the capital charge (before symmetric adjustment) is reduced to 30%, compared to the 39% and 49% charges for ordinary Type 1 and Type 2 equities.
Whether this easing of treatment is enough to persuade insurers to invest more in infrastructure investments is debateable. With the majority of funding for such assets coming from annuity books, EIOPA should also consider whether lower fundamental spreads could be justified under the matching adjustment rules, which might go a lot further to incentivising investment by the large life insurers in such assets.
One positive that can be gleaned from the process is the speed at which EIOPA has acted to introduce the infrastructure asset class, albeit under significant political pressure. This bodes well for potential future changes to the Solvency II regulations.
"The new infrastructure asset class has grabbed most of the headlines in recent months, and not all of it has been positive"
