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EIOPA advises to set up a new asset class for high-quality infrastructure investments under Solvency II
29/09/2015 12:00

The European Insurance and Occupational Pensions Authority (EIOPA) published today its Advice to the European Commission on the identification and calibration of infrastructure investments risk categories. 

EIOPA has suggested a more granular approach by advising to create a separate asset class under Solvency II standard formula for investments in infrastructure projects. This new asset class seeks to capture high quality infrastructure, whilst recognising the complex and heterogeneous nature of such investments.

The proposed approach meaningfully reduces risk charges for qualifying infrastructure project investments in equity and debt. At the same time EIOPA proposes robust risk management requirements including active monitoring of exposures to infrastructure projects as well as sound stress testing of their cash flows.

Gabriel Bernardino, Chairman of EIOPA, said: "EIOPA has made remarkable progress in proposing a new asset class and a prudentially sound regulatory treatment within a very short timeframe. Investments in infrastructure could be very important for the insurance business because, due to their long-term nature, they may be a good fit to match long-term liabilities while also increasing portfolio diversification. However, infrastructure projects can be very complex and require specific risk management expertise.

It is very important that risks of infrastructure investments are properly managed and monitored over time. Under such conditions, I believe that the proposed calibrations reflect the risk profile of high-quality infrastructure projects".

According to the Advice, qualifying infrastructure investments will need to satisfy conditions relating to the predictability of the cash flows to investors, the robustness of the contractual framework, and their ability to withstand relevant stress scenarios.

Regarding calibrations, EIOPA recommends that the spread risk charge within the Solvency II standard formula is amended for qualifying infrastructure debt investments according to a modified credit risk approach (reduction of around 30% in the risk charge for BBB rated qualifying infrastructure). Risk charges for infrastructure equity investments are proposed to be in a range between 30% and 39%.

In terms of risk management, insurers should in particular conduct adequate due diligence prior to the investment; establish written procedures to monitor the performance of their exposures and regularly perform stress tests on the cash flows and collateral values supporting the infrastructure project.

Click here to access the Advice.