Lower Solvency II risk weighting expected

It is anticipated that insurers will be able to benefit from a lower Solvency II capital charge when investing in private funds.

The risk weighting associated with private funds under the pan-European insurance regulation, Solvency II, is expected to be lowered from the current 49 percent to 39 percent.

Solvency II requires insurers to hold varying levels of capital based on the riskiness of an asset. For private fund holdings, insurers are currently required to set aside €49 for every €100 invested under a default risk model. The funds industry has long feared this will price many insurers out of allocating capital to private funds.

However, European private equity trade body, the European Private Equity & Venture Capital Association (EVCA), told pfm it understands that the European Commission will propose a lower risk weighting for private equity and venture capital.

“The Solvency II risk weightings for different asset classes are still under discussion and the European Commission is expected to present a formal proposal in the coming weeks, EVCA public affairs director Michael Collins said in an email. “If confirmed this would be a welcome development and better reflect the true risk that insurers face when investing in the asset class than the 49 percent proposed originally.”

GPs on the fundraising trail will be relieved to hear that the capital charge will be lowered as insurers are expecting to up their private equity commitments, despite the threat of Solvency II.

According to a May survey from Goldman Sachs Asset Management 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).

However, not all insurers have such an optimistic outlook. Aktia Life Insurance previously told PEI's Research & Analytics division 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.

And Lexington has bought many of Generali’s private equity fund interests, including Candover 2005, Cognetas Fund II, and Ironbridge Fund II, according to PEI's Research & Analytics division, as Generali looked to reduce its private equity exposure as a result of Solvency II.

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