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European governments are eager to encourage investment in long-term investments in utilities and public works to help stimulate economic growth, and hope the insurance industry – the region's largest institutional investor – will lead the way. However, infrastructure currently accounts for a tiny fraction of total assets. In a survey of 13 European insurers carried out by Oliver Wyman, infrastructure represented only €12 billion out of €3 trillion total balance-sheet assets.
In 2012, the European Commission (EC) launched the project bond initiative to encourage institutional investment in infrastructure. Yet Klaus Wiedner, head of the insurance and pensions unit at the EC, suggests this has not ended the debate on how best to invest in the asset class, and says there needs to be more discussion on how to structure the assets to make them more attractive to insurers.
Wiedner also played down the idea that concerns over Solvency II's capital charge for long-term investments is preventing greater investment in infrastructure. "What I feel is that prudential rules are one part of it, but if I ask [insurers] why don't you invest here, [they say] legal uncertainty; policy [uncertainty]; politicians may change course during the infrastructure project, what do you do then?" he said.
Olav Jones, deputy director-general of Insurance Europe, said: "Regulation has the biggest effect because it has a direct impact on the economics of the company, so if a particular asset is attracting more regulatory capital than the company considers is appropriate for risk, then that will change their behaviour".
Jones believes the Solvency II calibration for long-term investments does not account for the actual default risk of these assets, which is the primary risk insurers have to reserve for when using a buy-to-hold strategy.
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