Solvency II should be amended to offer insurance companies the ability to invest in infrastructure as a standalone asset class, the European Commission has been urged.
The European Insurance and Occupational Pensions Authority (EIOPA), submitting its advice, backed the creation of a standalone asset class for infrastructure projects, so long as insurers had adequate due diligence procedures in place.
EIOPA cited the need for a more granular approach, with the new asset class capturing high-quality infrastructure, while accepting its “complex and heterogeneous” nature.
The new asset class, covering qualifying investments in infrastructure equity and debt, would “meaningfully” reduce the capital requirements placed on insurers, EIOPA argued.
The supervisor’s chairman Gabriel Bernardino praised its “remarkable progress” in finalising details of its advice, drafted after initial discussions began in February.
He said infrastructure would act as a good match for liabilities but warned that the asset class could be complex and require “specific” risk management expertise.
“It is very important,” he said, “that risks of infrastructure investments be properly managed and monitored over time.
“Under such conditions, the proposed calibrations reflect the risk profile of high-quality infrastructure projects.”
As part of the requirements, EIOPA recommended that infrastructure investments be stress-tested, assessing the ability to meet financial needs under “sustained” stresses, including adverse refinancing conditions, severe economic shocks, delays in construction and construction company insolvencies.
Additionally, scenarios would have to account for the risk of reduced income from the project, as well as the impact of adverse weather conditions on the asset.
The industry was supportive of a band of 30-39% as a capital charge for infrastructure equity, although EIOPA said further work would be needed.
However, the supervisor said it accepted that some areas, such as Public Finance Initiatives, could even warrant a risk charge below 20%.