Solvency II: latest proposals to encourage infrastructure investments

Solvency II: latest proposals to encourage investments

The latest EIOPA consultation relates to the proposed treatment of infrastructure corporates.

Director and Insurance regulatory lead, EMEA

KPMG in the UK

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Continuing the Commission’s desire for insurers to increase the proportion of their investment portfolio invested in infrastructure investments, the European Insurance and Occupational Pensions Authority (EIOPA) released its latest proposals on 15 April.

As we reported in last month’s newsletter, reduced capital charges apply to “qualifying infrastructure investments” under the Amendments to the Commission Delegated Regulations, which became effective on 2 April, 2016. However, the conditions attached to this definition effectively mean that only a subset of infrastructure special purpose vehicles can benefit from this. 

Latest EIOPA consultation related to infrastructure corporates

The latest EIOPA consultation relates to the proposed treatment of “infrastructure corporates”. The proposed definition is:

  • “an entity or group which derives the vast majority of its revenues from owning, financing, developing, or operating infrastructure assets in the EEA in the following lines of business:­
    • Generation, transmission or distribution of electrical energy;
    • ­Distribution or transmission of natural or petroleum gas;­
    • Provision of water, wastewater or recycling services;­
    • Transport networks or the operation of transport assets;­ 
    • Social infrastructure.”

What’s included, and what’s not in the consultation paper

The consultation paper does not include final calibration proposals in a number of areas, as EIOPA is conducting further analysis prior to the delivery of its final advice. However, it does propose a differentiated approach under the standard formula solvency capital requirement, but not as generous as that agreed for “qualifying infrastructure investments”. For example, EIOPA proposes that the charge for infrastructure corporate equity should be 36 percent for both listed and unlisted infrastructure corporates is proposed (subject to the investment meeting set criteria) compared to 30 percent for qualifying infrastructure investments. However EIOPA wishes to undertake further analysis of infrastructure corporate debt before it determines whether a differentiated spread risk charge is appropriate. Although it believes that a credit assessment of at least credit quality step 3 would be required.

EIOPA proposes that the assessment of ‘the vast majority of its revenues’ criteria would be based on latest financial information, or a financial proposal where this is not available. Otherwise, the infrastructure corporate must have been active in the stated lines of business for at least five years. The requirement that the vast majority of revenues comes from EEA countries reduces political risk, but limits geographical diversification of infrastructure investments.

Similar to the criteria for classification as a qualifying infrastructure investment, EIOPA proposes a number of criteria regarding classification as an infrastructure corporate. These are less detailed than for infrastructure projects, but include a number of similar risk elements including cash flows predictability, financial structure and security. Similar risk management requirements would apply, including the due diligence requirements, although those elements that are directly related to the project itself would not be required.

It is encouraging to see evidence of joined up thinking - given the Commission’s plan for European Long-Term Investment funds and other initiatives for energy. However, it remains unclear how much appetite insurance companies that are not currently investing in infrastructure will move to do so as a result of these changes, but for those keen to invest, the proposed widening of the classes of infrastructure investments will be welcomed.

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