Infrastructure will remain relatively small proportion of insurers' assets

01 October 2015

Plans to create a new infrastructure asset class with lower capital requirements under Solvency II should encourage investment in the sector by insurers, Fitch Ratings said, but the agency believes the pace of investment will not accelerate rapidly as insurers will want to build their expertise in this asset class.

Fitch said there is broad appetite to increase infrastructure investment, but this has been slow to take off for reasons that include uncertainty about capital requirements and political risk.

This comes after the European Insurance and Occupational Pensions Authority (Eiopa) that recognised in a technical report these assets might merit lower charges (IAR, 29 September, Eiopa finalises plan to slash SII infrastructure debt charges).

On the back of the advice, the European Commission has put forward a proposal to amend the Solvency II legislation on 30 September.

Fitch said the reduction is likely to increase demand from insurers, before noting that "infrastructure will remain a relatively small proportion of overall assets."

Requirements that insurers demonstrate robust risk-management processes to take advantage of the lower charges are unlikely to be a significant hurdle for most firms as these systems are likely to be already in place.

Fitch noted that many life insurers are well placed to invest in infrastructure as they can hold the assets to maturity to match their long illiquid liabilities, such as annuities. "By doing this, insurers can access the extra yield available to compensate for the lack of liquidity, which can limit the attractiveness for other investors," Fitch pointed out.

Infrastructure debt's cashflow features and long duration means it will probably be most attractive to insurers that sell long-term financial products with guaranteed returns, including many firms in Germany and the UK.

The direct impact of the proposals would probably be greater for German firms because most of them will be using the standard formula for calculating capital.

Most UK firms with significant guarantee business will use their own internal models, which will already allow them to hold less capital if they can persuade regulators the level is appropriate. Eiopa's lower proposed capital charges would only apply directly to the standard formula, but insurers using an internal model could cite them to justify lower charges in that model, said Fitch.