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Good News for Insurers: European Commission Facilitates Wider Range of Equity Investments

  • United Kingdom
  • Financial services and markets regulation
  • Financial services



European Union Directive 2009/138/EC, also known as Solvency II, has had the effect that (re)insurers have been discouraged from investing in unlisted equities. Under the final text of a proposed amendment to the Solvency II delegated regulation, published by the European Commission in March 2019, this may change with the creation of a more favourable position for certain investments. The aim of the amendment is to respond to the concerns of (re)insurers by mobilising private sector investment, in turn making it easier and more attractive for (re)insurers to invest in equities and potentially private equity funds.

The proposed amendments would ensure that, if certain requirements (discussed below) are complied with, (re)insurers wishing to invest in equities will be subject to a smaller capital charge.

Current treatment of equities

A (re)insurer subject to Solvency II is required to maintain a portfolio of assets to meet its insurance liabilities and also additional capital to cover the risks of certain adverse events occurring in the next 12 months. Those risks have been categorised into certain ‘modules’ under the Solvency II regime, for the purpose of applying consistent risk margins across all insurers when calculating the effect of those risks on the level of capital an insurer is required to hold.

The ‘Market Risk’ module applies certain assumptions to insurers’ capital requirements relating to risks arising from adverse market movements. To reflect the fact that in times of adverse markets the value of investments may decrease, insurers are required to apply a ‘capital charge’ to the value of assets in their portfolios (based on a 1 in 200 year scenario stress). The capital charge for certain equities can be quite penal (up to 49% of the market value).

For the purposes of the Market Risk module, equities are categorised into ‘type 1’ equities, ‘type 2’ equities, ‘qualifying infrastructure equities’ and ‘qualifying infrastructure corporate equities’.

‘Type 1’ equities means equities listed in regulated markets in countries which are either an EEA member state or an OECD member state. Type 1 equities will also include: (i) equities held within social enterprise funds; (ii) equities held within qualifying venture capital funds; and (iii) equities held within closed-ended unleveraged EEA AIFs, or third-country AIFs marketed in the EU. The capital charge which must be applied to the value of ‘type 1’ equities as standard is the sum of 39% plus the ‘symmetric adjustment’ (+ or – 10%) (save in the case of certain ‘strategic’ investments).

‘Type 2’ equities are, broadly, all other listed or unlisted equities which are not ‘qualifying infrastructure equities’ or ‘qualifying infrastructure corporate equities’. The capital charge which must be applied to the value ‘type 2’ equities as standard is the sum of 49% plus the ‘symmetric adjustment’ (+ or – 10%) (save in the case of certain ‘strategic’ investments).

‘Qualifying infrastructure equities’ and ‘qualifying infrastructure corporate equities’ are additional categories of specific investments designed to enhance investment by insurers in EU infrastructure projects. Broadly, these are shares in companies or in corporate groups which carry out infrastructure projects and which meet certain qualifying criteria. The capital charge which must be applied to the value of ‘qualifying infrastructure equities’ and ‘qualifying infrastructure corporate equities’ may be as low as 22 %.

Where equities (of any type) are either in a group entity of the insurer or are investments of a ‘strategic’ nature (which requires specific tests to be met) a lower capital charge of 22% shall be applied.

New Rules: qualifying unlisted equity portfolios

One proposed amendment is to create a new category of ‘qualifying unlisted equity portfolios’. Under the amendments, these baskets of high quality European unlisted equities will benefit from an elevated status equal to that of listed equities (i.e. type 1 equities). Where a (re)insurer holds a portfolio of equities which meet specified criteria, then the capital charge will be 39% instead of 49%.

The criteria to qualify as a ‘qualifying unlisted equity portfolio’ include, amongst other things:

(1) each company in the basket must have its head office in the EEA

(2) more than 50% of each company in the basket’s annual revenue must be in EEA currencies or in currencies of OECD countries

(3) more than 50% of each company in the basket’s employees must work in EEA countries

(4) the companies must meet minimum size requirements (turnover or balance sheet of €10,000,000, or at least 50 staff)

(5) the investment in each company in the basket must not equal more than 10% of the total value of the basket

New Rules: long-term equity investments

A further important development introduced by the proposal is the creation of a new category of equities known as ‘long-term equity investments’. If equities fall within the relevant criteria, then (re)insurers can treat them in the same way as strategic equities, meaning their balance sheet value would only be reduced by 22%.

Unlike the criteria for ‘qualifying unlisted equity portfolios’, long-term equity investments must be held against an identified portfolio of liabilities and must be ring-fenced from the remainder of the (re)insurer’s fund. In this way, the long-term equity investments will potentially operate in a similar manner to matching adjustment funds, of which many (re)insurers will be already familiar.

The criteria for long-term equity investments are:

(1) the portfolio of investments and the holding period are clearly identified

(2) the portfolio covers the best estimate of a specific portfolio of insurance or reinsurance obligations

(3) the portfolio is identified, managed, and organised separately from other activities of the (re)insurer and cannot be used to cover losses arising from other activities

(4) the technical provisions in the portfolio only represent a part of the total technical provisions of the (re)insurer

(5) the average holding period of the investments in the portfolio exceeds 5 years

(6) the portfolio consists only of equities in companies that are listed in EEA countries or unlisted companies with their head offices in EEA countries

(7) the solvency and liquidity of the (re)insurer are strong enough to avoid forced sale of each investment within the portfolio for at least 10 years (even in stressed conditions)

There are two caveats to the above which are well worth mentioning. Firstly, the relevant regulator must be “satisfied” that the relevant equities meet each of the criteria before the 22% capital charge can be applied. It isn’t yet clear what this means in practice, but potentially could require an approval from the relevant regulator to hold a ‘long-term equities’ fund (similar to a MA fund).

Secondly, once a (re)insurer starts holding a ‘long-term equity investments’ fund, it cannot easily revert back to not holding the fund without consequences. If a (re)insurer does stop holding a ‘long-term equity investments’ fund, in cannot re-start for 36 months.

The new rule will potentially make private equity funds much more attractive to (re)insurers. (Re)insurers are allowed to satisfy the criteria by simply looking at the profile and investment guidelines of the funds they wish to invest in, as opposed to looking at the specific investments below the fund. This is good news for the private equity world, which structure their funds regularly in a way which would most likely meet the asset-based criteria.


The table below summarises the current position in respect of the capital charge of different equities under the proposed amends:

Strategic Long-term equity
All other investments

Type 1
(ie. listed equities, equities in unleveraged alternative
investment funds, qualifying
unlisted equity portfolios)

22% 22% 39% + symmetric adjustment
(+ or – 10%)
Type 2
(all other equities)
22% 22% 49% + symmetric adjustment
(+ or – 10%)
Qualifying Infrastructure corporate equities 22% 22% 36% + 92% of the symmetric adjustment

Next steps

The final text of the proposed amendments discussed above was published on 8 March 2019. following consultations with expert groups, EU citizens, the European Parliament and the European Council. There will now be a period of 3 months for the European Parliament and the Council to review the final text. If agreed, the amendments will enter into force 20 days after publication in the Official Journal of the European Union.

Solvency II will be reviewed again shortly, with such review terminating towards the end of 2020. The European Commission has stated that it will be even more ambitious in its efforts to improve the functioning of Solvency II.

How Eversheds Sutherland can help

The Eversheds Sutherland insurance and financial services teams act as trusted legal advisers, risk managers and strategic business partners. Our international network of lawyers and former regulators, advise leading insurers, asset managers, banks and broker-dealers on insurance and reinsurance transactions and on the full range of regulatory process, including regulatory change implementation, enhanced supervision and regulatory investigations as well as ongoing regulatory and compliance advice.

Our in depth understanding of the insurance and reinsurance sector, the asset management sector and private equity, along with our experience with the practical implementation of new governance arrangements, means that, when these rules are implemented, we are very well placed to guide you through your implementation process. We can also offer bespoke training on the issues raised, as well as general Solvency II training, for all sectors of the financial services industry.