European insurers are a potentially powerful financing channel for long-term investment in growth- and job-enhancing areas: at the end of 2010 they had assets worth €7,400 billion which is more than 50 per cent of European GDP. However, regulatory capital requirements are one of the determinants as regards institutions' financing decisions of long-term physical investment even though they alone do not determine the investment behaviour of insurers. Nonetheless, investment incentives are influenced, to a substantial extent, also by the design and calibration of the regulatory capital requirements.
While it is true that Solvency II had been conceived in very different economic circumstances from those that have been experienced in recent years, Mr Faull assumes that the Framework Directive adopted in 2009 is sufficiently flexible to allow insurers to adapt to the current state of the economy.
In that context, he would be grateful to EIOPA for examining whether the calibration and design of capital requirements for investments in certain assets under the envisaged Solvency II regime necessitates any adjustment or reduction under the current economic conditions, without jeopardising the prudential nature of the regime.
The analysis will be based on the non-public working document "draft implementing measures Solvency II" sent to EIOPA on 3 November 2011. This non-public document already reflects past CEIOPS advice and lessons drawn from the fifth Quantitative Impact Study (QIS5).
Mr Faull is conscious that the capital requirement for an investment in a given asset depends on whether the insurer underwrites long term or short term insurance contracts. The matching between assets and liabilities is different in the two cases and the capital requirements are reflective of this fact (through a capital requirement for interest rate risk). This component of the capital requirements however remains frequently disregarded in the studies on Solvency II incentives, although it may have a significant impact. Thus he would be grateful if the analysis would give due regard to this component too.
Furthermore, considering that insurers and banks may finance the same type of assets bearing the same risks, it is also important to gauge whether capital requirement rules under CRD IV and Solvency II are consistent and are providing a competitive "level playing field", to forestall any hazardous regulatory arbitrage between the banking and the insurance sector. Because of the dynamics of the legislation making and the different external constraints, it would be very helpful if EIOPA could coordinate its efforts with both ЕВА and ESMA.
The scrutiny should focus mainly on 'long-term finance' and should include at least the following assets:
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infrastructure financing and other long-term financing through project bonds, other types of debt and equity;
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SME financing through debt and equity;
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socially responsible investments and social business financing through debt and equity;
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long-term financing of the real economy through securitisation of debt serving the above mentioned purposes.
Mr Faull asked for feedback before 1 February 2013.
Full letter
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