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The European Insurance and Occupational Pensions Authority (EIOPA) has been asked by the European Commission to review whether the current calibrations of Solvency II need to be adjusted so as not to discourage insurers from investing in long-term assets such as infrastructure projects.
The review will examine Solvency II's treatment of debt and equity financing of infrastructure projects, SMEs and socially responsible projects and businesses. The capital charges imposed on the securitisation of debt relating to these projects will also be looked at.
The insurance industry has complained that the current calibrations of Solvency II's standard formula are too harsh and do not properly reflect the risks of these asset classes.
Another concern for insurers is the impact on their capital requirements of balance-sheet volatility caused by short-term fluctuations in the mark-to-market value of long-term assets. A matching adjustment has been proposed to reduce the impact of spread movements in assets backing long-term liabilities that are held to maturity, but the scope and operation of this tool has yet to be agreed.
The standard formula's treatment of securitisations has also been criticised as being too harsh and for failing to recognise the diversity of the market. The current calibrations have relied heavily on the performance of US subprime home equity loan securitisations – one of the market's worst-performing asset classes.
The insurance industry is concerned that the high capital charges will make securitisations impossible to invest in, according to Jones at Insurance Europe. There are concerns that the punitive capital charges could be detrimental to the provision of finance to smaller companies as this is financed through the securitisation market.
The Commission is also concerned that the capital requirements for banks under Basel III and insurers are consistent to ensure there is no potential for "hazardous regulatory arbitrage" between the two sectors.
EIOPA has been asked to complete the study by February 1, 2013.
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