Small and medium-sized insurers could soon follow the lead of their larger counterparts in moving into infrastructure investments, thanks to the changes in capital adequacy rules proposed by the European Insurance and Occupational Pensions Authority (Eiopa).
This is according to Berlin-based Scope Ratings.
The nub of the proposals is a reduction in the capital charges on insurers' infrastructure investments under the Solvency II standard formula from up to 59% to between 30% and 39% (IAR, 3 July 2015).
"Small and medium-sized insurers in particular will profit from these changes," said Aaron Konrad, analyst for alternative investment funds at Scope Ratings.
Large insurers often have their own risk models to calculate capital adequacy requirements and can therefore hold less capital than smaller insurers in this asset class, he added.
Insurers' demand for infrastructure assets is matched by greater, long-term needs for investment. By 2018, €1trn ($1.15trn) needs to be invested in European infrastructure, according to the European Commission.
The EU's so-called 'Juncker fund' is targeting €315bn to boost infrastructure projects. "But the capital demands for these projects go way beyond public funding sources," explained Konrad. "The public sector alone cannot support such volumes, opening up the opportunity for medium-sized insurers to participate in these investments."
Until recently, it was mainly big insurers with proven experience in financing infrastructure projects that invested directly in roads, power plants and hospitals. In contrast, smaller insurers generally invest by using infrastructure funds, because they often lack the specialist expertise and scale for direct investments.
Infrastructure investments, said Konrad, offer achievable returns well above government bonds, while income from fees and usage charges are also reasonably predictable and stable. Furthermore, the risk of loss is generally low on projects with state participation.
"However, the spectrum of risk-return profiles for individual investments is very widely distributed," says Konrad. "Traditional infrastructure investments, such as toll roads and hospitals, which are typically state-funded, frequently offer lower returns than privately developed wind parks, which are higher risk with greater income fluctuations."
Infrastructure investments also have little correlation to stock and bond markets.
At the start of the third quarter, 151 unlisted infrastructure funds with a target volume of $97bn were active worldwide, according to asset data intelligence service Preqin. Of that total, they plan to invest $40bn in European infrastructure, the highest target investment volume since 2007.