The Solvency II capital charges for investment-grade infrastructure debt could be cut by almost one third, under proposals put forward by the European Insurance and Occupational Pensions Authority (Eiopa).
In a highly anticipated move, the authority revealed it is recommending the creation of a new asset class under the standard formula for infrastructure investments of "high quality". The European Commission, which has the final say over the rules, said it will amend the calibrations before the end of the year.
This represents a significant concession to industry, which has repeatedly blamed the punitive regulatory treatment for restraining demand for infrastructure assets, despite declining returns in traditional fixed income assets (IAR, 26 August, SME insurers may step up infrastructure investments).
As the standard formula calibrations stand, infrastructure debt is equated to corporate bonds, even though there is significant evidence that infrastructure investors face much lower losses in the event of default than those lending to companies (IAR, 10 August 2015, Draft plans to cut infra Solvency II charges "not sufficient").
In a technical paper released on 29 September, Eiopa recommended that the spread risk charge for infrastructure debt within the standard formula is amended according to a modified credit risk approach.
This results in a reduction of the charges for BBB-rated infrastructure assets of about 30%, six points more than in draft proposals released for consultation in July (IAR, 3 July 2015, Eiopa cuts Solvency II infrastructure charges).
Furthermore, Eiopa recommends that the risk charges for infrastructure investments range between 30% and 39%.
To benefit from the reductions, insurers will need to demonstrate they have robust risk-management processes and controls.
Firms are required to conduct establish written procedures to monitor the performance of their exposures and regularly perform stress tests on the cash flows and collateral values supporting infrastructure projects.
Gabriel Bernardino, chairman of Eiopa, said: "Investments in infrastructure could be very important for the insurance business because, due to their long-term nature, they may be a good fit to match long-term liabilities while also increasing portfolio diversification.
"However, infrastructure projects can be very complex and require specific risk management expertise. It is very important that risks of infrastructure investments are properly managed and monitored over time. Under such conditions, I believe that the proposed calibrations reflect the risk profile of high-quality infrastructure projects."
People:Gabriel Bernardino
