Insurance companies must hold capital in proportion to their risk. While that burden eased in 2019 when the European Commission introduced the Long-Term Equity Investments (LTEI) category, reducing the capital charge on eligible investments to 22%, the stringent and sometimes ambiguous LTEI eligibility rules have dampened insurers’ appetite for longer-term equity holdings.

That is, until 2024, when the EU Commission Council and Parliament finalised the Solvency II review, which relaxed LTEI eligibility criteria to try to incentivise insurers to invest longer-term equity capital and thereby drive broader economic growth. Highlights1 include:

• Contractual ring-fencing requirements have been removed, broadening eligibility by decoupling LTEI assets from corresponding pools of insurance obligations.
• Ambiguous stress tests to ensure “no forced sale” of LTEI assets within a decade have been replaced by a commitment to retain the investments for more than five years on average.
• European Long-Term Investment Funds (ELTIFs) and “lower-risk” Alternative Investment Funds (AIFs) can be assessed at the fund level instead of looking through to the underlying assets.
• Eligible investments include listed and unlisted companies headquartered in both EEA and OECD countries.

In our view, these changes could significantly broaden the adoption of LTEI among European insurers and potentially reshape their asset allocation strategies. Even with the widening of the symmetric adjustment (SA) corridor from ± 10% to ± 13%, we believe the 22% capital charge for LTEI could appear more appealing compared with other equity classifications.

You can now read the full whitepaper at the link below