The revision of the Solvency II directive governing the insurance sector will have a limited impact on equity investments, conclude Willem Pieter De Groen and Inna Oliinyk, researchers at the Financial Markets and Institutions Unit of the think tank CEPS (Centre for European Policy Studies). In a study commissioned by the European Parliament’s Committee on Economic and Monetary Affairs (ECON), published on Monday 19 September, experts say that to significantly increase equity investment, factors other than prudential ones should be targeted.
According to the two researchers, EU insurance companies invest only about €1.4 trillion in equity, excluding investments in related parties, which is equivalent to about 16% of their total investments at the end of 2021.
This underinvestment can be explained by both internal and external factors. The main internal factors relate to asset and liability management and liability characteristics, while the main external factors relate to financial market conditions and the regulatory framework, including accounting standards and tax treatment.
Of the proposed revisions, the proposal to widen the upper and lower limits of the symmetric adjustment is likely to have an impact on capital requirements only under extreme market conditions, which is quite rare. Similarly, the clarification and broadening of the long-term equity investment criteria and the changes to the duration-based equity module are not expected to have a significant impact.
To significantly increase equity investment, the researchers recommend going beyond the prudential treatment of equity. The two avenues to be considered are (1) to develop the segment of unit-linked and index-linked products, which invest relatively more in equities; (2) to make equity investment more attractive for life and composite insurance companies.
To read the CEPS analysis: https://aeur.eu/f/35n (Original version in French by Anne Damiani)