The European Commission’s (EC) proposal to lower Solvency II capital charges for longer-term business will benefit the European insurance sector’s burgeoning interest in ESG investments, according to Fitch Ratings. The rating agency notes that life insurers are especially well-positioned to invest in longer-term assets, including sustainable infrastructure and renewable energy projects, although they are somewhat hindered by supposedly high capital requirements. The reforms, published by the EC, outline the opportunity in the Solvency II review to ensure the regulatory framework is conducive to long-term investment in the insurance sector. They are designed to both reduce the risk margin provision that insurers are required to hold against some long-term business, and to lower the capital chargers for those that are not determined ‘long-term’. The EC predicts that the reduced risk margin could release up to €90 billion of capital, while the lower charges for long-term equities may release around €10 billion. Insurers and policyholders will, therefore, benefit from higher returns on longer-term, often illiquid, assets. Fitch expects that Germany, Italy and the Netherlands will experience the largest capital impact, as the countries have a high proportion of life insurance business with long-term investment guarantees. However, the agency also notes that, in practice, net capital release may be affected by an increase in provisions owing to the proposed phase-in of lower long-term discount rates.
