European Commission encourages insurers to invest in Private Equity

Funds of Funds Experts
Lower Mid-Market Experts

The insurance and reinsurance sector are facing one of the biggest changes since the approval of Solvency II in 2016. Solvency II is a European directive that consists of a set of rules which regulate the risk that an insurance company can bear when investing. Its entry into force was a turning point in the sector evidenced in two fundamental points:

  • The possibility that each insurer could calculate its solvency ratio based on internal models that consider specific factors and particular situations.
  • The need to consider external risks, such as market risk, operational risk or credit risk.

Since its implementation, several experts have expressed the need to reformulate certain parts of the directive that affect the ability of insurers to invest in certain assets, especially those considered as long-term investments, including Private Equity.

How will the Private Equity industry benefit from these new measures? The most eagerly awaited changes included in the proposal have been, the revision of the proportionality criterion that will allow small insurers to be exempted from the scope of Solvency II, and therefore have a percentage of free disposal to invest in Private Equity. On the other hand, the reduction of the stress criterion applied to long-term investments has been reduced from 49% to 22%, this percentage is used directly to calculate the solvency ratio.

Finally, it should be considered that for now it is just proposal and that it must go through the usual European legislative process for the approval of directives, so it is not expected to be approved until 2023/2024.

Source 1: Debevoise & Plimpton. www.debevoise.com/insights/publications/2019/05/european-commission-incentivises Source 2: Lloyd´s. www.lloyds.com/conducting-business/regulatory-information/solvency-ii/about/level-2-implementing-measures Source 3: Invest Europe. www.investeurope.eu/media/3820/invest-europe-position-paper-on-solvency-ii.pdf