The European Commission (EC) has proposed amending Solvency II legislation to enable insurers to invest millions in new long-term infrastructure projects across Europe.
The European Investment Bank estimates that the EU may need up to €2trn (£1.5trn) in investment in infrastructure before 2020, some of which the EC said could come from insurers if it relaxed the rules around the capital requirements for holding infrastructure in their portfolios.
Many insurers are reluctant to invest in infrastructure because under current Solvency II rules they are obliged to hold a high level of capital against those investments. EU insurers currently have approximately €22bn invested in infrastructure, representing less than 0.3% of their total assets.
Currently, an insurance company wanting to invest in a public project such as a motorway would be subjected to the same capital charge as if it invested in any private company, despite such infrastructure assets having a better risk profile.
However, the EC said: “The Commission is proposing today that will modify the Solvency II Delegated Regulation to create better incentives for insurers to invest in infrastructure projects, in particular by reducing the amount of capital which insurers must hold against the debt and equity of qualifying infrastructure projects.”
The amended regulation introduces a new concept of ‘qualifying infrastructure investments’ that present better risk characteristics than other infrastructure investments. Insurers will need to hold a lower level of capital against their investment in these infrastructure projects.
In order to qualify for these reduced capital charges, infrastructure projects must be able to generate predictable cashflows and withstand stressed conditions. The investments can take the form of equities, bonds or loans and the contractual framework of the project should contain provisions to protect investors. Insurers must be able to hold investments in bonds to their maturity.
The EC said at the end of 2014, European insurers had almost €9.9trn invested on behalf of their policy holders.
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