‘Excessive’ capital requirements stand in the way of CMU, insurance industry warns

While EU policymakers hope to mobilise more private capital for investments through the Capital Markets Union (CMU), high capital requirements prevent insurance companies from “playing a bigger role”, industry association Insurance Europe warned, on Thursday (30 May), calling for a revision of how the rules are calculated.

Insurers have a large role in CMU plans, investing around €6.6 trillion a year in EU equities, corporate debt, and sovereign bonds. However, the industry group warned that the way capital charges are calculated, and the range of investments insurers can engage in, hinders their role in financing a broader set of assets and businesses.

“Insurers’ business model allows them to have a long-term investment time horizon, to focus on the long-term performance of assets, invest in illiquid assets, and act as a countercyclical buffer,” said the association.

Meaning, that capital requirements should be generally lower for them, compared to investors who engage in short-term trading, as stated in a position paper laying out their priorities for revamping CMU plans.

The goal of strengthening the decade-old CMU plan recently regained momentum as the EU hopes to boost private funding to key targets such as the the green energy transition – at a time when the post-pandemic public funding programme is set to expire in 2026, leaving an investment gap calculated to hoover around €620 million per year.

Current capital rules for insurers set in the “Solvency II” framework, requires a sum of money set aside for every investment into financial market assets, depending on their level of identified risk – also referred to as capital requirements.

The recent Solvency II revision updated rules seven years after coming into force, was adopted by the European Parliament in April, but needs to be implemented at national level.

“The Solvency II review needs to deliver on its potential to address the […] framework’s current excessive capital [charges] and volatility, resulting in unnecessary barriers for long-term, guaranteed and profit sharing products,” the association wrote.

“In the case of equities,  [revising insurers’ capital treatment would] mean basing capital charges on the risk of long-term underperformance of the asset, and not only on a short-term trading risk approach,” the position paper adds.

It goes on to say: “It is therefore key that the Level 2 technical details of the Solvency II review are finalised taking into account the impact of the review on the fulfilment of the CMU objectives.”

Add transparency and scale to fund more businesses

Insurance Europe warns private debt, private equity, venture capital, listed equity and infrastructure projects, all key for shoring up the European economy and SME funding in particular, are not currently suitable for insurers.

“Another current barrier is that [these] CMU-type assets can be hard for insurers to access due to lack of sufficient scale and lack of suitable information on those assets.”

However, “there are examples at national level of funds being created, often with the involvement of insurers and governments, containing [those] assets,” the group said, that “provide the scale and access for a wide-range of insurers to invest in these asset classes.”

Legislators should “assess where and why such funds have been successful and how their use can be expanded to other EU markets,” it said, adding “the potential for multi-national or EU versions of such funds and potential benefits involving financial instruments such as Invest EU should be investigated.”

The association warned insurers’ cross-border investment is hindered by lack of harmonisation of insolvency proceedings and of “clear dispute settlement procedures between investors and member states.”

Streamlining insolvency laws across Europe has recently been identified as a shared CMU priority between EU leaders at a special summit in April.

‘Nudge’ consumers to invest more

Insurance Europe’s position paper aligns with those of the EU leaders’ conclusions – which were presented by the high-level single market report of former Italian Prime Minister Enrico Letta – on the need to initiate stronger cross-border retail investment, including pan-European pension and savings products.

On the other side of the capital flow, the association said EU citizens should be motivated to put more of their money into savings products, as 72% of them have so far not invested “in any financial product.”

“Increasing the flow of money into savings and retirement savings is key to increasing the funds available for the investment by institutional investors, including insurers,” writes association.

Governments should set up “pension dashboards and tracking systems” to show consumers how little their pension could end up being without proper investments, they stress.

“Many Europeans under-estimate their need to invest for retirement,” the association writes, pointing out such systems could “nudge and help citizens to invest more.”

[Additional reporting by Anna Brunetti]

[Edited by Anna Brunetti/Rajnish Singh]

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