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The unofficial draft Level 2 text states that insurers investing in collective funds can calculate their regulatory capital on the basis of the fund's target asset allocation, if certain conditions are met. But experts fear the conditions attached to the exemption are too vaguely defined, and that a strict legal interpretation of the rules could undermine insurers' asset allocation strategies, in particular their investments in actively managed funds.
Solvency II's look-through principle enables insurers to calculate the solvency capital requirements of a structured product or collective investment vehicle based on the risk of the underlying securities. But this can be a complex challenge, as a full analysis of the exposure would need to be computed.
The amendment is broadly in line with the technical specifications used by the European Insurance and Occupational Pensions Authority for recent quantitative impact studies, including the long-term guarantees assessment [LTGA] in 2013. But slight changes to the wording may suggest the commission intends to narrow the scope of the exemption, say experts.
One area of difference is the circumstances where look-through is deemed not to be applicable. The technical specifications state this to be the case where the scheme "is not sufficiently transparent, while the new Level 2 draft says the exception is allowed when look-through "cannot be applied".
Another change in the language of the Level 2 text relates to the constraints imposed on the management of the fund.
The technical specifications drafted by Eiopa state that if the exemption applies, reference should be made to the fund's investment mandate. Insurers should then plot the riskiest possible allocation within the boundaries of the mandate to calculate their regulatory capital.
The amended unofficial draft of the delegated acts was discussed last week with Member States at the commission's expert group on banking, payments and insurance. Informal discussions with the industry are to follow at the beginning of February. Policy-makers are expected to clarify the wording in the final version of the draft, which should be stabilised before the European elections in May.
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