Main Takeaways

The European Commission (EC)’s Delegated Regulation of 8.3.2019 amends the Solvency II Directive in different areas. Most notably, from an investment perspective, a new category of equity investments has been introduced to the equity risk sub-module: Long-term Equity (LTE) investments.

The LTE category complements the one-year VaR view underpinning the entire Solvency II regulation with a long-term investment view. In this way, the EC recognises the role of insurance companies as long-term equity investors. Investments in listed and unlisted equities that meet the LTE definition are subject to a significantly reduced capital charge of 22% compared to 39% for type 1 equities or 49% for type 2 equities. Additionally, LTE investments are not subject to a symmetric adjustment. In this way, LTE portfolios are treated in the same way as strategic participations.

This new equity risk category and its calibration relies on the work conducted by CEIOPS for the duration-based equity risk sub-module set out in Art. 304 of the Solvency II Directive. In fact, the LTE concept can be seen as a revision of the duration-based equity module but with less restrictive requirements. However, the conditions that a qualifying LTE investment must fulfill could remain challenging for many insurers and may require a restructuring of the insurance obligations of the respective insurance company. In particular insurers that already have strong asset-liability matching regimes should be able to benefit from the reduced capital charges on LTE portfolios. This, for example, includes insurance companies with a significant annuity business such as life insurers in the UK or Spain, many of whom are already users of the matching adjustment. Additionally, insurance companies in France and in Denmark often have a liability structure that is favorable for LTE investments. Given the significant reduction in the Solvency Capital Requirement (SCR) that the LTE classification offers other insurance companies may consider modifying parts of their books and portfolios in order to meet the requirements for LTE investments. This is especially true for insurers that already hold significant equity portfolios such as insurers in the Nordics. Moreover, LTE investments might be an interesting opportunity to back parts of run-off portfolios. This paper discusses the criteria that an equity portfolio must fulfill in order to be recognised as a LTE investment.

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