Solvency II - Capital Efficiency through Infrastructure Investments

Insurer investors can play a pivotal role in stimulating economic growth and development by investing in essential infrastructure assets. These are often recognized as ‘fundamental facilities’ which serve a country or a city. Luxembourg’s Findel airport is a good example of an essential public service, as it connects Luxembourg with other countries across the globe. 

Let’s be honest, distinguishing between what is essential and what it is not, can prove challenging… That’s why it’s been a matter of  debate between the European Commission and the European Insurance and Occupational Pensions Authority (EIOPA). To benefit from lower capital requirements, an insurer can invest in a variety of sectors including:

• Waste management and recycling (e.g. hazardous waste management)
• Green energy production (e.g. wind power or solar panels)
• Social infrastructure (e.g. hospitals, schools, libraries, social housing)
• Transportation (e.g. entity operating and maintaining port facilities, bridges, motorways)

In 2015, the Investment Plan for Europe was launched to close the investment gap left by the financial and economic crisis in the EU. It aimed at mobilizing huge investments in key sectors to stimulate the economy.

One reason for this investment gap was related to the low presence of insurance companies in infrastructure investments. According to the European Commission: “As government bond yields were higher in the past, insurers did not find it necessary to invest in infrastructure to generate long term cashflows.” However, an insurance sector body claimed that “with an appropriate calibration of the risk charges for infrastructure investments, insurers may increase their allocation at least by 100% over the next decade.”

To remove regulatory barriers to insurers’ into infrastructure entities[1], the Commission Delegated Regulation 2015/35, as amended, entered into force (infrastructure assets are addressed in the Market Risk Module of the Solvency II framework).

So, what do these amendments do?

• Provide definition of Infrastructure Assets and Infrastructure Entity in Art.1, Point 55a and Point 55b
• Clearly distinguish between infrastructure project investments and infrastructure corporate investments, by presenting a set of distinctive regulatory criteria in Art. 164a and 164b
• Allow for substantially lower solvency capital charges for debt and equity investment toward qualifying infrastructure assets

Insurer companies — and particularly life insurance companies — require long-term investments (such as infrastructure investments) to support their long-term commitments to their policyholders. The solvency capital required to be held by insurance companies is determined by their liabilities profile as well as the risk calibrations on their investments. These insurance companies are in a better position to fulfil their obligations to their policyholders through safer infrastructure investments, characterized by low correlation with other volatile asset classes and stable cash flows. Beyond that, by investing in these types of assets, insurer investors can benefit from lower solvency capital requirements.

At KPMG Luxembourg, our clients include insurers and asset managers that invest across the globe with funds domiciliated in Luxembourg. Over the years, we have analyzed infrastructure assets and infrastructure entities with various legal structures operating in multiple sectors.

To better assist our clients, we took a deep dive into all relevant regulatory developments. Based on our research, we created a set of criteria to assess eligibility against the regulatory requirements.

Our team combines actuarial experts (to perform all necessary calculations), regulatory specialists (to help navigate regulatory ‘grey areas’) corporate finance specialists (to analyze all financial statements and documentation), and sector-specific experts (to provide guidance on specific industry matters).

 A Due Diligence Report where we reveal all our findings and evaluations. We can also perform an ongoing due diligence on your assets.

Our goal is to guide asset managers as they create an attractive marketing approach for their funds for insurer investors, and to help insurers benefit from the lower solvency capital requirements if they use the standard formula.

More questions or need guidance? We can help. Get in touch with our team today!

[1] Art.1, point 55b of Commission Delegated Regulation 2015/35, as amended, defines an ‘Infrastructure entity’ as entity or corporate group which, during the most recent financial year of that entity or group for which figures are available or in a financing proposal, derives the substantial majority of its revenues from owning, financing, developing or operating infrastructure assets 

This article was collaboratively written by Sven Muehlenbrock, Partner, KPMG Luxembourg.