How to find the right SCR for PE under Solvency? – assessing the EIOPA final advice on the unlisted equities module

Frank Dornseifer

End of February 2018 EIOPA provided the EU Commission with its’ final advice on specific items in the Solvency II Delegated Regulation, which is – within the capital markets union action plan (“CMU”) – part of the current Solvency review. The mandate given was a “review of unjustified constraints to financing […] in view of removing barriers to investments in unrated bonds and loans and in unlisted equity, in order to improve insurers’ ability to invest in private placement offerings and in private equity.”

Following the methodological assessment performed by BAI in cooperation with CEPRES and SOF we identified several drawbacks in the EIOPA approach, including

  • the lack of data availability,
  • inappropriate model variables and
  • a very high operational complexity

which would lead to the consequence that almost no PE portfolios would be able to qualify under this approach. In consequence we addressed our concerns to the EU Commission which is currently preparing the amending regulation.

One – “quick fix” – option to mitigate the shortcomings is to change simply either the model variables or the threshold suggested by EIOPA. Another option, which also considers our methodological concerns and therefore would reflect the risk-return-profile of PE more accurately, would be to use real private equity data for the calibration and consider the long-term investment horizon of PE investments (e.g. based on the duration of individual insurance liabilities). We trust that this approach would increase i) the methodological correctness, ii) the operational usability and finally iii) the regulatory consistency.

Only a SCR below 30% is truly reflecting the risk of PE portfolios

Our data and empirical analysis further give evidence that the target SCR given in the mandate of the EU Commission, i.e. 39% (Type-1-Equities), is still not adequately capturing the true risk of PE (fund) portfolios which would justify a SCR well below 30%. Especially as closed-ended and unleveraged AIFs, the typical structure for a PE fund, anyway qualify under the Delegated Solvency Regulation for Type-1-Equities we advocate for a substantial review of the entire equities module, which would allow to move below the target of the EU Commission. Otherwise the entire work and analysis undertaken by EIOPA and the industry has little impact which would be regrettable not just with regard to the CMU goals outlined above and the needs of insurance companies searching for yield but also with regard to the further growing financing role the PE industry plays.

Frank Dornseifer; Managing Director Bundesverband Alternative Investments e.V. (BAI)

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