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.

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.

While this 49% capital charge can still apply to unlisted equity, over the course of the past few years several reductions to this basic righs-weight have been introduced including for: 

Closed-ended and unleveraged, EuVECA and ELTIF funds

Under the 2015 review of the Delegated Acts, all private equity funds that can be deemed closed-ended and unleveraged, venture capital funds that are EuVECA designated and private equity funds that are ELTIFs have been deemed to be ‘type 1 equities’ and as a result all attract a significantly lower risk weighting of 39%.

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. Following amendments to the Solvency II Delegated Regulation introduced in 2016 and 2017, infrastructure investments are now able to benefit from a 30% risk weight and “Infrastructure corporates” are subject to a 36% risk-weight.

Long-term equity 

One of the latest initiatives of the Capital Market Union was a review of Delegated Acts in March 2019 to give insurers' long-term equity exposures a risk-weight of 22% provided they meet a series of conditions, including the length of the investment and its geographic location. For Type 1 equities, these conditions are determined at the level of the fund. 

Invest Europe Position

While all recent revisions of the Solvency II Delegated Acts have represented significant positive changes for our industry, 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 future review of the Solvency framework, scheduled for 2020, provides another opportunity to clarify this. 

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