10 August 2015

Insurance Europe response to EIOPA’s consultation on the infrastructure advice

The specific draft proposals are a step in the right direction. However, the proposed definition is too narrow and the capital charges still exaggerate the risk posed by investing in infrastructure. Therefore, the current draft is not sufficient to remove the unnecessary barriers to investment.

Although it is difficult to determine the exact risk parameters, there is enough evidence that a risk-based calibration can be set at significantly lower levels for both infrastructure debt and equity. This should be reflected for individual debt and equity risks, but also examined from a portfolio perspective, in which correlation between infrastructure and other investments should be recognised as being zero or very close to zero. In addition, several concerns remain about the identification of infrastructure risk categories, which should be addressed in EIOPA’s final advice to ensure that particular details in the identification requirements do not unnecessarily exclude good infrastructure projects.

The following adjustments should be made to the proposed definition:

• The definition is too restrictive. It should be extended to corporates operating infrastructure assets, provided that the cash flows or assets pertaining to the infrastructure activities are efficiently ring-fenced and that infrastructure investors benefit from a privileged access to such cash-flows and/or assets.

A number of adjustments should be made to the proposed criteria, including:

• There needs to be more flexibility in the area of criteria, since the current list of criteria has the potential to disqualify many projects and, therefore, not remove impediments for infrastructure investments.
• The advice should consider internal ratings equivalent to the External Credit Assessment Institutions (ECAI) rating, as long as such internal ratings are assigned based upon an appropriate internal credit assessment, consistent with Solvency II’s prudent person principle.

Regarding the recalibration proposals, Insurance Europe notes the following:

• If  a  recalibration  of  the  risk  charges  for  infrastructure  in  the  spread  risk  module  is  chosen,  then  a combination of EIOPA’s liquidity and credit risk approach should be considered.
• A proposal  for  a  calibration  in  the  counterparty  default  risk  module should  be  included  in EIOPA’s advice. An example for a calibration is included in Insurance Europe’s comments to section 5.1.

The advice does not distinguish between listed and unlisted infrastructure equity. The advice should include the latter in a new market risk sub-module with a risk charge of 22% and very low, preferably zero, and correlation with other sub-modules.

Full response

EIOPA_consultation

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