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Solvency II

Background

Solvency II is a review of prudential regulation for the European insurance industry. It provides a risk measurement framework for defining capital requirements for insurance companies. With insurers representing more than 10% of the investment into European private equity, Solvency II has the potential to affect the investment flowing into the industry. The capital that must be set aside by insurers to address the risks they face for investing in private equity will be a significant influence on their asset allocation decisions. While larger insurers will most likely use an ”internal model” to determine how much capital they need to hold to cover their investments, the smaller players will rely on the ”standard model” set out in Solvency II.

Private equity

For private equity investments, the European Insurance and Occupational Pensions Authority (EIOPA) first suggested that the standard model should use a risk weighting of 49%, significantly higher than the industry felt was appropriate. But the final set of the Delegated Acts agreed upon in the beginning of 2015 differentiates private equity from other types of alternative investment fund that will continue to attract a 49% risk weighting. It states that private equity funds that are closed-ended and unleveraged and venture capital funds that are EuVECA designated will both be treated as the so-called ‘type 1 equities’ and will attract a significantly lower risk weighting of 39%.

Encouragingly, in the Action Plan for a Capital Markets Union, published in September 2015, the European Commission suggested this risk-weighting could be re-assessed as part of the Solvency II review in 2018.

Infrastructure

One of the first concrete actions that the European Commission decided to take under the Capital Markets Union was to look at whether “infrastructure” should become a separate and distinct asset class under Solvency II. This is an important debate for Invest Europe members operating infrastructure funds.

On 30 September 2015, the European Commission published its proposal to revise the Solvency II delegated act and proposed a new ‘infrastructure’ definition. Investments meeting this definition would be able to benefit from a 30% risk weight. Some further work however remains to be done around the treatment of “infrastructure corporates”.

Invest Europe Position

Although Invest Europe modelling suggested that the ideal risk weighting for private equity would be around 30%, the reduction that was proposed in the final text of the Solvency Delegated Acts was nonetheless a significant improvement, providing incentives for insurers to invest in the asset class and reintroducing a differentiation between private equity and other alternative investment funds.

Invest Europe will continue to make the case that a market-based approach to valuing long term assets such as private equity is inappropriate and the Capital Markets Union initiative provides another opportunity to clarify this. Meanwhile, our priority with respect to the treatment of infrastructure is to ensure that all types of direct and indirect investments, including investments via infrastructure funds, can qualify for the specific treatment under Solvency II.