Capital charges and definitions relating to infrastructure, SME investments and securitisations need to be urgently refined in order to remove disincentives for investment, according to the lobby group, Insurance Europe.
In its response to the European Commission on the green paper on capital markets union, it said that the starting point for Solvency II's treatment of infrastructure should be "a high-level, all-encompassing definition" of the term.
There should also be changes to Solvency II's standard formula treatment of infrastructure. Unlisted infrastructure equities should be captured under a new sub-module in market risk, with a 22% charge and a correlation of zero with other sub-modules.
For infrastructure debt, Insurance Europe recommends treatment under the counterparty default risk module to reflect better the real risk to which companies are exposed. "If infrastructure debt remains within the spread risk module, spread calibrations would have to be reduced by a significant factor in order to correctly reflect the better recovery rates exhibited by infrastructure compared to other corporate bonds," the association said.
Insurance Europe acknowledged the challenging circumstances under which the European Insurance and Occupational Pensions Authority (Eiopa) is working on infrastructure. But added that "there are many areas of the Solvency II framework where Eiopa has had to use expert judgement because of the lack of historical data."
The association said for some areas of infrastructure, such as defaults and recoveries, there are studies to draw on, and in other areas, such as correlation and equity risk, "economic rationale may need to be relied on and supported by modelling/anecdotal evidence where available."
On securitisations, Insurance Europe called for changes to the capital charges for type 1 high-quality securitisations, so that they are aligned with the current charges for corporate bonds.
There should also be recognition of junior tranches and collateralised loan obligations (CLOs) as part of type I qualifying securitisations.
Insurance Europe argued that high-quality short-term securitisations(e.g., asset-backed commercial paper) should be considered as cash instruments, with similar prudential treatment.
Changes to capital charges for securitisations of residential loans should be capped at the level of charge applied to the underlying pool of residential loans.
Transitionals designed for listed equity should also apply to unlisted equity to avoid unnecessary forced selling.
European Long-Term Investment Funds (ELTIFs) can succeed if the assets they invest in (e.g., infrastructure and SMEs) have more appropriate capital charges, Insurance Europe said, calling for capital treatment to be in line with their underlying investments.
"Fund initiatives similar to ELTIFs that have been launched in a number of member states should be allowed to continue to work in parallel with ELTIFs and given a similar prudential treatment," Insurance Europe added.
It is also important that any specific treatment involves a look-through approach as a preferred methodology for deriving capital charges. "If this is not the case, the key concept of pooling risks to diversify would no longer be reflected in the prudential treatment and would create disincentives to investing in the pool," Insurance Europe stressed.
Since the EC is currently said to be considering treating ELTIFs as type 1 equity, Insurance Europe added, "Care must be taken that any changes to the Delegated Act do not prevent a look through-approach being applied to ELTIFs." (See IAR, 11 May, Commission to impose low charges for long-term funds).
Other issues raised by Insurance Europe include the impact that the implementation of the central clearing obligation for derivatives under the European Market Infrastructure Regulation (EMIR) will have on insurers' holdings of long-term assets, and the long delay in finalising the International Accounting Standards Board's (IASB) insurance contracts project (IFRS 4 phase II, covering insurance liabilities).
Insurance Europe called for "strong and active involvement of the Commission on accounting issues" because "IFRS accounting requirements can have a major impact on the ability of insurers to invest long-term."
The association said "insurers should be allowed to delay the application of IFRS 9 so that they can implement it at the same time as IFRS 4, and therefore avoid misleading accounts and unnecessary costs."