Among the proposals contained in the envisioned Solvency II regime that the Europan Insurance and Occupational Pensions Authority (EIOPA) takes issue with are those that call for the industry to cut capital charges on insurance companies’ infrastructure and private equity investments, which EU politicians thought would be a way of boosting growth and employment in the bloc.
The Discussion Paper on Standard Formula Design and Calibration for Certain Long-Term Investments, as the EIOPA’s document is called, was unveiled on EIOPA’s website yesterday, and is open to comment from industry participants and the public until 28 May.
Among the EIOPA’s findings was that the proposed changes to the "standard formula" used to calculate the amount of capital insurers are required to put aside as a buffer for use in the event of investments going bad could result in unforseen consequences, such as "a build-up of risk concentrations" in any sector in which preferential treatment was given, "with the associated higher level of systemic risk".
"In every asset class there are subsets that have relatively lower risk, and others with higher risk than the standard formula implies," the 73-page paper notes.
"Introducing separate treatments for such subsets may lead to a more risk-sensitve formula, but will also increase the complexity of the standard formula. Therefore, for each case a well-considered decision will have to be made whether the benefits of a more granular approach outweigh the drawbacks."
Other concerns included a worry that historical market data was insufficient for assessing the risks of investing in some categories of investments, to an extent that the rules, as written, do not allow for; and certain structural difficulties for those seeking to invest in infrastructure projects that make accurate risk assessment difficult. (The use of listed infrastructure corporates as a "proxy" in order to invest in frastructure projects "may be only of limited use since there are clearly differences in the risk profile of project equity and corporates like utilities, toll road operators, etc".)
CBI: ‘impact…worse than expected’
Reacting to the proposals, an official of the UK’s CBI, which represents some 240,000 businesses that together employ around a third of Britain’s private sector workforce, said the EIOPA’s preliminary results "show the impact of these proposals are even worse than expected".
“The European Commission must not ignore this warning," Neil Carberry, CBI director for Employment and Skills said, in a statement.
“An additional £450bn cash call on businesses would damage growth and job creation, as well as destabilising financial markets.”
