The German Insurance Association (GDV) argues that government initiatives designed to encourage insurers to invest in the sector would face high capital charges under Solvency II, making such investments unworkable. Investment in infrastructure is expected to be classed alongside equities by Solvency II, attracting a capital charge of 49 per cent.
"Insurers are thinking about investing more in new or alternative energy because the returns can be far better than they can be from government bonds", says a GDV spokesman. "Under Solvency II, the capital requirements for infrastructure investment are still very high because it is not really recognised that secure returns can arise from these investments."
The increased interest in infrastructure investment was observed in a study undertaken by the German financial insurer BaFin. The study, published in May this year, found that insurers were switching to higher yielding investments because of the low return on fixed-income bonds.
In May 2011, the German government pledged to phase out all of the country's nuclear power plants by 2022. Ambitious plans to replace the power plants with green energy projects, such as solar panels and wind farms, were anticipated to receive significant funding from the insurance sector.
Maik Schulze, a senior portfolio manager in alternative investments at German insurer Gothaer Finanzholding, based in Cologne, says: "There is social and political demand for investment in renewable energy projects and insurers are frequently mentioned as one pool of capital. The asset itself provides a stable cash flow and long duration so it would be perfect for us, but right now Solvency II would be a drawback to this."
One particular concern is whether infrastructure assets would be qualifying under the matching adjustment for calculating the discount rate on long-term liabilities. Insurers are worried the mechanism will operate under strict requirements on the type and quality of assets held and on the type of products to which it could apply. The current proposals restrict insurers' holdings of assets rated lower than BBB and are not clear as to the types of asset classes that are admissible.
These concerns have been recognised by the European Commission. In June this year, Michel Barnier, the European commissioner for internal market regulation, argued that Solvency II should be encouraging long-term investment to support the real economy. "It seems logical for an insurer offering pension policies with guarantees lasting several decades to invest in very long maturity bonds. A very long-term investment of this kind could be used, for example, to fund infrastructure projects and thereby create growth", he said.
The German government's efforts to encourage investment infrastructure echo those of domestic and international institutions throughout Europe. The UK government is trying to encourage insurers and pension funds to provide £20 billion of the construction costs for 500 building projects in the UK. The Association of British Insurers (ABI) has warned that Solvency II could threaten the success of such policies. Meanwhile, the European Investment Bank is seeking to encourage infrastructure finance by using European funds to provide a 'risk cushion' for investment in infrastructure project bonds.
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