08 April 2013

EIOPA: Discussion Paper on standard formula design and calibration for certain long-term investments

Investment in the drivers of growth, productivity and competitiveness generally requires finance over an extended time horizon.

In this context the European Commission (EC) asked EIOPA in a letter dated 26 Sep 2012 to examine whether the calibration and design of regulatory capital requirements for insurers’ long-term investments in certain asset classes under the envisaged Solvency II regime necessitates any adjustment or reduction under the current economic conditions without jeopardising the prudential nature of the regime. The Solvency II directive is to be taken as a given.

As a minimum, EIOPA should cover the following assets in its analysis:

• infrastructure financing and other longterm financing through project bonds, other types of debt and equity;
• Small and Medium sized Enterprises (SME) financing through debt and equity;
• Socially Responsible Investments (SRI) and social business financing through debt and equity; and
• long-term financing of the real economy through securitisation of debt serving the above mentioned purposes.

The analysis is to be based on the non-public working document "draft implementing measures Solvency II" made available to EIOPA by the European Commission on 3 November 2011. It should properly take into account the influence that the maturity of insurance liabilities has on regulatory capital requirements for long-term investments. Moreover, consistency with the regulatory capital requirements in the banking sector has to be considered.

EIOPA has already carried out an in-depth analysis of the asset classes explicitly listed in the EU Commission’s letter. The first step in the analysis was to gain a thorough understanding of the economic rationale for the asset class and its specific risk profile. To achieve this EIOPA has analysed for each asset class the available literature on the adequateness of the Solvency II calibration as well as academic and practitioners’ literature on its performance and riskiness. A second step was the analysis on the availability of data for the individual asset classes which may be used for a potential refinement of the regulatory capital requirements.

The aim of this discussion paper is to present EIOPA’s preliminary findings. This is intended to offer stakeholders an opportunity to inform EIOPA’s further technical work on these issues, in particular in relation to data limitations. The further insights and valuable input gathered in this way will help EIOPA to produce a well-informed recommendation on the design and calibration of the standard formula in relation to the asset classes considered. Stakeholders should be aware that EIOPA continues in parallel to analyse the appropriateness of the design and calibration of the standard formula. EIOPA will also look at the influence that the maturity of insurance liabilities has on regulatory capital requirements for long-term investments. Last but not least EIOPA will look at non-regulatory obstacles for long-term investments by insurers.

The scope of this analysis has been limited to investments. In parallel EIOPA is performing the Longterm Guarantee Impact Assessment (LTGIA). The main focus of this exercise is on possible adjustments to the calculation of technical provisions to take into account the specificities of insurers’ long-term guarantees business. The issues of long-term investments and long-term guarantees are of course closely connected. There are already several elements in the existing Solvency II framework that incentivise long-term investments. Combining the results of both work streams will allow a comprehensive analysis whether it is necessary to add further ones.

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