Illiquid asset funds to attract low charges under Solvency II

17 February 2015

The European Commission is proposing to apply reduced capital charges to insurers' investments in European long-term investment funds (Eltifs), as part of a push to get the capital markets union off the ground.

Eltifs are designed to encourage investments in asset classes that are too illiquid to be included in existing fund structures, which typically have flexible redemption rights.

European legislators agreed on the regulation that sets the framework for these fund vehicles in November and are pinning their hopes on it to help channel funds to cash-strapped companies and infrastructure projects.

The legislative push, which is a key piece in the broader plan to create a single capital market, will extend to Solvency II, as officials work to remove barriers for insurers to invest in these funds, Insurance Asset Risk understands.

In a green paper to be published on 18 February, the Commission will propose that Eltifs units be included in the standard formula's lower equity bucket.

This would bring the capital charge down to 39%, 10 percentage points lower than other equity investments. The effective charge could further reduced if the insurer takes benefits for diversification or matching.

The Commission first admitted to plans to amend Solvency II to allow for a favourable treatment of Eltifs when it adopted the first delegated act last year.

It noted that this would be consistent with the approach taken towards European social entrepreneurship funds and European venture capital funds, which have also been created by legislation to fuel investments in areas deemed beneficial to the economy.

The final version of regulation on Eltifs will be discussed and voted in the plenary session of the Parliament next month. The text is a less restrictive version of the proposal the Commission put forward in 2013. It imposes limits on the types of assets the Eltifs can invest in, the leverage ratio of the funds and early redemption.