Based on the technical advice of EIOPA, the European Commission (EC) delegated regulation of 8.3.2019 amends the Solvency II regulation in different areas. Most notably, from an investment management perspective, the capital charges for qualifying investments in long-term equities, unlisted equity and unrated debt have been reduced.

Main Takeaways

Unlisted equity
Certain investments in unlisted equities may be eligible for a treatment as type 1 equities, allowing for a reduced capital charge of 39% compared to 49% for type 2 equities. Aside from a range of qualitative and diversification conditions, the equity investment need to show a low beta coefficient on a portfolio level. Since it is not possible to calculate a beta based on the unlisted equities return (since they are not listed), a formula based on financial ratios is defined to approximate beta. The new provisions are mainly relevant for direct private equity investments while many investments via funds may already subject to a type 1 equity charge.

Long-term equity investments
Long-term investments in equities with an average holding period of more than 5 years can benefit from the same capital charge as strategic participations, given that specific criteria regarding asset-liability and risk management are met. Long-term equities and strategic participations are subject to a favorable capital charge of 22% without an asymmetric adjustment. The fact that a long-term equity portfolio must be assigned to a specific pool of insurance obligations over the entire lifetime of these obligations may limit the applicability to a smaller group of insurer, e.g. insurers in the UK or Spain that also use the matching adjustment or France where the liability structure is more favourable. The concept of long-term equity investments is very similar to the duration-based equity risk sub-module.

Unrated debt
Unrated bonds and loans with proven quality can be assigned to a credit quality step (CQS) of either 2 or 3 (corresponding to an ‘A’ or ‘BBB’ rating). The Spread SCR for those bonds will decrease by up to 20 percentage points if a bond or loan can qualify as such. There are two different ways for loans to qualify. The first is based on an internal credit assessment taking into account qualitative and quantitative factors. This internal credit assessment is a complex process which may require a substantial amount of research. The alternative way is for an insurer co-invests into a loan with a bank if the bank discloses sufficient information on the credit quality and methodology of the credit assessment to the insurer. However, we deem this challenging since banks would probably be reluctant to share this kind of information.

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