Following the receipt of technical advice from the European Insurance and Occupational Pensions Authority (EIOPA), the European Commission (the Commission), on 30 September 2015, adopted a delegated regulation (the Amending Regulation)1 amending the Solvency II Delegated Regulation ((EU) 2015/35) (the SII Regulation). Once the Amending Regulation is effective, the amended SII Regulation will, amongst other things, treat investments in infrastructure as an asset class distinct from other long-term investments.
Why create a distinct asset class?
By amending the SII Regulation, the Commission aims to incentivise long-term investment in infrastructure by the insurance industry and further the Investment Plan for Europe (announced in November 2014) by removing obstacles to investment. Currently, an insurance company wanting to invest in a public project such as a motorway would be subject to the same capital charge as if it invested in any private company, even though infrastructure projects generally benefit from predictable future revenues (like motorway tolls) and therefore have a better risk profile.
Once the SII Regulation is amended, qualifying infrastructure investments will be subject to a risk calibration of 30% instead of the standard 49% for unlisted equities.
What are “qualifying infrastructure investments”?
In accordance with the EIOPA technical advice, in order for an investment to be within the asset class, it must have the following core criteria:
- The existence of a sound business plan and investor control.
- Predictable cash flows.
- Stability under stressed conditions.
- A contractual framework that ensures investor protection.
The asset class comprises equity investments as well as investment grade and unrated debt. Non-investment grade debt is excluded for prudential reasons. The category is limited to investments in special purpose vehicles that own, finance, develop or operate infrastructure assets that provide or support essential public services. This category does not, as yet, extend to corporate investments in infrastructure companies. However, EIOPA and the Commission will be examining the calibration of capital requirements for investments in infrastructure corporates.
When do the amendments become effective?
Assuming that the European Parliament and European Council do not object to the Amending Regulation nor extend their three month consultation period, the amendments should be published in the Official Journal and become effective by the end of December 2015.
Other changes made by the delegated regulation
Importantly, the Amending Regulation will also do the following once effective:
- Extend the transitional measures in relation to equity capital charges so these measures apply to all equities purchased before the end of 2015 (currently, this only applies to equities traded on a regulated market) and clarify how insurers should apply the transitional measures to managed funds.
- Allow investments in European long-term investment funds (ELTIFs) to benefit from the same capital charges as investments in European Venture Capital Funds and European Social Entrepreneurship Funds, which benefit from the same equity capital charge as equities traded on regulated markets (lower than for other equities).
- Grant equities traded on multilateral trading facilities (MTFs) the same capital charge as equities traded on regulated markets.