When the European Commission pressed ahead, against EIOPA’s advice, with a reduction in the capital charge for long-term equity (LTE) investment last year, many in the asset management community saw an opportunity, but insurers have been coy in taking advantage of the rule.
However, insurers not making the most of the rule does not mean the rule itself is bad, EIOPA’s head of policy Justin Wray said at Insurance Asset Risk 2020 EMEA conference.
Speaking on a panel on the Solvency II 2020 review, Wray acknowledged that insurers had given feedback to the European watchdog announcing their support to the principle of a different treatment of LTE, but on the other hand they find the current legislation too difficult to operate.
Therefore, it is important that the upcoming review looks at the conditions for equity to qualify as LTE, Wray continued. “It is important that we make the link to long term illiquid liabilities. The risks of forced sales are lower where the assets are held against longer terms liabilities.”
It is also important to make a distinction between the equity insurers currently hold which they find difficult to qualify for LTE and future equity investments, he added. The regulation creates the conditions for more investments in LTE in the future.
“I wouldn’t say that because at the moment not much equity qualifies, that means the conditions we are looking to set are wrong,” Wray said. “It simply means that the current investments were made in different circumstances and therefore it is important to look into the future.”
