EU regulator: Solvency II boon for PE

Insurance regulator the European Insurance and Occupational Pensions Authority (EIOPA) disagrees with criticisms from the private funds industry that insurers need to set aside too much reserve capital to invest in private equity under the Solvency II directive.

In a speech at the regulator’s annual conference in Frankfurt, Gabriel Bernardino, chairman of EIOPA, said insurers must not focus on the stand-alone risk charges, which stand at €39 for every €100 invested under a default risk model for private equity.

“Some consider that the calibration of risk charges for certain asset classes are too prudent. Nevertheless, we should remember that in Solvency II stand-alone risk charges are not the appropriate measure because diversification benefits need to be taken into account,” said Bernardino. “So the marginal capital requirement is of course a more appropriate measure. In fact, if we base our analysis on the marginal return on regulatory capital, investments in high quality securitizations, infrastructure debt and private equity are, at least on a relative basis, quite attractive.”

Nonetheless, insurers see Solvency II as reason to pull back from private equity investing. Last month, a survey of institutional investors conducted by UBS Fund Services and ‘Big Four’ audit firm PwC revealed that 70 percent of European insurers said they will be less willing to invest in alternative assets as a result of Solvency II.

However, similar surveys have produced conflicting results. A May survey from Goldman Sachs Asset Management found that 28 percent of 233 global insurers surveyed intend to increase their investment in private equity. Insurers also aim to increase allocations to infrastructure debt (29 percent) and real estate equity (26 percent). 

Anecdotally, insurers have been easing off private funds over the past year. Aktia Life Insurance previously said that Solvency II was the sole reason why it will not make any more private equity investments. Another insurer, Groupama, sold Groupama Private Equity to fund of funds ACG Group last year, as part of an effort to sell assets not central to its insurance business. 

Solvency II, which was originally scheduled to go live in January 2014, is expected to take effect from January 2016.