EIOPA advises to enhance the asset class under Solvency II

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In a report published by The European Insurance and Occupational Pensions Authority or EIOPA, published a report to advise on the extension of the infrastructure asset class for high-quality investments under Solvency II.

The report covers the Technical Advice to the European Commission (EC) on the identification and calibration of infrastructure corporates.

EIOPA's flag flapping in front of Westhafen Tower
EIOPA’s flag flapping in front of Westhafen Tower

The said advice was established upon request from the EC to further elaborate on the Advice of 29th September 2015 where EIOPA proposed a new asset class under Solvency II for investments in infrastructure projects.

In its latest advice, EIOPA recommends to extend this asset class in two ways. The first one is to let certain infrastructure corporates to qualify for the management for infrastructure projects only if there is an equivalent level of risk.

The second is to generate a separate differentiated management for equity investments in high-quality infrastructure corporates.

EIOPA proposes to reduce the risk charges for equity investments if the corporates have a lower risk profile. Insurers are required to conduct adequate due diligence and create written procedures in order to monitor the performance of their exposures and EIOPA also recommends that they perform stress testing on the cash flows and collateral values supporting their investment

Gabriel Bernardino, Chairman of EIOPA, said in a statement: “After having carefully analysed the evidence available, we propose a risk-based enhancement of the Solvency II asset class for high-quality infrastructure investments regarding infrastructure corporates. As infrastructure investments can be complex, they require prudentially sound treatment and specific risk management expertise. Where the risks are probably managed, our proposals will help insurers to match their long-term liabilities, to increase their portfolio diversification, and thereby better protect policy holders and support the strategic objective of building the EU Capital Markets Union”.

EIOPA’s Financial Stability Report consists of two parts – the standard part and the thematic article section. The standard part is structured as in previous versions of the EIOPA Financial Stability Report.

The first chapter discusses they key risks identified for insurance and occupational pension sectors. The second, third and fourth chapter provides the final qualitative and quantitative assessment of the risks identified.

This assessment is done in terms of the scope as well as the probability of their materialization using economic techniques and qualitative questionnaires. Finally, the thematic article elaborates on the impact of mergers and acquisitions on European insurers using data on equity prices.

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