A European Commission proposal to lower Solvency II (S2) capital charges for long-term equities may spur the region’s insurance sector to show more interest in assets with environmental, social, and governance (ESG) characteristics, according to a recent report from credit ratings agency Fitch Ratings.
In a statement announcing the proposal, the European Commission said that the reforms would enable insurance companies to “scale up long-term investment” and allow them to “take better account of certain risks… including those related to climate.”
And according to Fitch, provisions in the proposal to reduce the “risk margin” that insurers must hold against certain long-term business could address the “unduly high capital requirements” that discourages insurers from investing in ESG assets.
“Insurers and their policyholders could benefit from the higher returns that may be available on longer-term, but often illiquid, assets,” said Fitch, adding that life insurers in particular “are well-placed to invest in longer-term assets – such as environmentally sustainable infrastructure and renewable energy projects.”
“We believe the main capital impact would be for life insurers with a high proportion of business with long-term investment guarantees, particularly in Germany, Italy and the Netherlands, where such business is prevalent,” said Fitch.
However, Fitch warned that, while it expects the reforms are likely to encourage more longer-term investments, the impact could be gradual “as it will take time for insurers to source investments they consider suitable.”
“Some insurers may initially use the extra capital freed up by the reforms to purchase more readily available shorter- or medium-term assets, to invest internally or to support shareholder distributions,” said Fitch.