Fitch: Allianz Infrastructure Move Confirms Solvency II Trend
German insurer Allianz is looking to increase its investments in infrastructure and renewable energy projects within the next two to three years, Juergen Gerke, head of Allianz Capital Partners told Reuters this week. Insurers' appetite to increase infrastructure investment makes sense since the assets are a good match for their long-term liabilities and can offer higher returns to compensate for the lack of liquidity.
German and UK insurers were likely to be the most attracted to infrastructure assets following the reduction in charges in the Solvency II standard formula. This is because of their business focus on long-term guaranteed financial products, which are well matched to the cash flow features and long duration of infrastructure debt. Most German firms are using the standard formula for calculating capital and would therefore benefit directly from the lower charges, but Allianz's move highlights that firms using internal models can also benefit from the Solvency II changes. They can justify lower charges in their models by citing the lower charges under the standard formula. Several UK firms with internal models are already moving into infrastructure assets.
There is increasing pressure on German insurers' ability to earn a sufficient return on investments. Average yields across German government bonds fell to zero for the first time this week according to the Bundesbank, reflecting shifts in the broader European government bond market from the ECB's bond buying and interest rate policies. The German life insurance industry is operating in a difficult environment, which could encourage them to search for higher returns from infrastructure investments.
The European Commission put forward changes on 30 September 2015 to the Solvency II Delegated Regulation to create incentives for insurers to invest in infrastructure projects, reducing the amount of capital which insurers must hold against the asset class under the standard formula. The lower charges formally came into force on 2 April 2016.
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