Solvency II: Marketing to Insurers in Europe Explained

49. 39. 36. 30. 22.

Those are neither a mysterious secret code nor lottery winning numbers. Converted into percentages these correspond to the amount of capital insurers must typically set aside when investing in private equity and infrastructure. And these matter for any manager wishing to market its fund to European insurers.

Whether an investment is subject to a 49% risk weight (the one for EU funds that are not closed-ended and unleveraged or for the majority of non-EU funds) or a much lower 22% (the one that applies to exposures that are part of long-term equity - LTE - portfolios), these risk charges affect the insurers’ economic rationale for investing into equity asset classes. And, ultimately, their ability to commit long-term capital to the economy through equity funds even in cases where the ultimate policyholder is protected.

The last ten years have seen intense debates on the exact level at which these percentages are set. With the review of Solvency II, scheduled for next year, we can expect these discussions to carry on into the next decade.

At the heart of the review will be the debate around the criteria under which insurers can set up their LTE portfolios subject to a preferential risk charge.

As EIOPA itself recently pointed out, only a few insurers are currently using the opportunity. This is not a surprise. Criteria have been widely criticised, including by Invest Europe, to be too restrictive and, perhaps most importantly, too complex. As a result, most long-term investments remain subject to higher risk weights, not appropriate to their risk profile, with the dramatic consequence that long-term commitments are effectively disincentivised.

It is therefore essential that policymakers listen to insurers and take the necessary steps in the upcoming review, whether it relates to the rules on ring-fencing, liquidity, or conditions on diversification or geographic origin, to make this category work for insurance investors across all EU Member States.

But Solvency II is not only about prudential capital requirements. It also requires the insurer to prepare detailed reporting to its national competent authority as well to assess risks being part of the internal investment and risk management process based on the Prudent Person Principle (PPP). Solvency II investors can fulfill those requirements only if the relevant granular look-through data is provided to the manager on a regular basis. The EU industry-wide standard for the data exchange between investors and managers is the Tripartite Template 5.0 (TPT 5.0).

As more and more managers are facing difficulties meeting these reporting obligations on behalf of their insurance investors, Invest Europe and SOF, a risk and reporting service provider for alternative investments, teamed up to prepare some guidance on the most appropriate way to report. Such guidance, which is based on the TPT 5.0 but adapted to the private equity specificities, is now available on our website exclusively to our members. If you are a fund manager faced with a reporting obligation, it will help you better understand how to comply with the requirements.

Next to this Guidance, you can also read our Solvency II Guide and with all the submissions we have made to the EU authorities in the past few years. Meanwhile, do not hesitate to also visit SOF website if you have further questions on the reporting requirements.