Proposals to lower Solvency II capital requirements for infrastructure investments have been welcomed as a way of enabling medium-sized and smaller insurers to move into the asset class.
But the Actuarial Association of Europe (AAE) has cast doubt over the validity of the proposals from the European Insurance and Occupational Pensions Authority (EIOPA) – as well as the degree to which insurers will invest in infrastructure.
This week, German rating agency Scope remarked on EIOPA’s plans to lower capital requirements for infrastructure from 59% to between 30% and 39%, saying: “Small and medium-sized insurers in particular will profit from these changes.”
But in its consultation response, the AAE raised concerns over the new proposals, stating “the model approach of EIOPA would not pass modelling standards for actuaries”.
In principle, the AAE said it welcomed EIOPA’s proposals for risk assessments and model calculations, describing them as “technically well done”. But the association told EIOPA that it sees “excessive model risks”, adding that “systemic risk stemming from political risk and from catastrophe risk should be given some room in the consultation”.
Christoph Krischanitz, chairman of the investment and financial risk committee at the AAE, told IPE: “First of all, infrastructure is not a homogenous, deep market to which market consistent valuation could be applied and, secondly, we have too little data to create a well founded model.”
The AAE has told EIOPA that, although the richness of infrastructure data will improve as more investors became more active in the asset class, new allocations to the asset class from insurers is likely to be limited.
The organisation said: “We have to be aware that infrastructure assets will not be a major part of the asset allocation of insurers. We even do not expect that the majority of insurance companies will invest in infrastructure assets for the next couple of years, and those who do, will select carefully.
“So we like to comment that the assumption of a well-diversified infrastructure portfolio is not seen to be very realistic.”
Krischanitz told IPE that increasing the complexity of the standard model to include infrastructure would only make sense if the asset class made up a significant portion of insurers’ portfolios.
“Including infrastructure investments means correlation to other asset classes and with it return expectations are changing,” he said.
Krischanitz said actuaries need “well-founded data to create resilient models” and such a data was still lacking for infrastructure.