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Solvency II implementing rules propose less stringent capital requirements for "high quality" securities

European insurers will be able to reduce the amount of capital they hold against "high quality" security holdings including those in long-term low-risk infrastructure investments, according to final implementing Solvency II rules published by the European Commission.

The Commission's 'delegated act' (312-page / 2.2MB PDF) contains detailed requirements which will apply to individual insurers and large insurance groups under the forthcoming Solvency II regime, which is due to come into force on 1 January 2016. Along with new capital rules which will apply to banks, the delegated act is the first to feature a "differentiated" approach to securities which will allow investors to receive "more proportionate and risk-sensitive prudential treatment", according to the Commission's announcement.

Michel Barnier, Commission vice-president responsible for the internal market, said that the new rules "put more flesh on the bones of the Solvency II Directive", as well as supporting incoming president Jean-Claude Junker's stated intention to encourage an additional €300 billion of investment into the real economy over the next three years.

"These detailed rules ... show that Europe is serious about creating a framework to support investment in the economy, particularly through promoting safe and transparent securitisation and encouraging insurers to invest for the long term," he said. "They also show that Europe is at the forefront of implementing internationally agreed principles and is making our financial institutions more resilient, while allowing for the financing needs of the real economy and respecting the diversity of our financial sector."

The new rules must now be scrutinised and approved by the European Parliament and Council before entering into force. These bodies have a maximum of six months in order to do so.

The Solvency II regime sets out broader risk management requirements for European insurers and dictates how much capital firms must hold in relation to their liabilities. The legislation was originally scheduled to come into force in 2012; however the Omnibus II Directive, which completed and finalised the new framework, was only approved by the European legislative authorities earlier this year. It must be transposed into national laws by 31 March 2015, to come into force on 1 January 2016.

The delegated act takes the form of a regulation, which means that member states do not need to individually transpose it into their national regulatory regimes. Its contents will make up the core of the single prudential rulebook which will apply to all insurers and reinsurers operating in the EU. It covers the valuation of assets and liabilities, including those of the 'long-term guarantee measures' allowing insurers to hold less capital against longer term liabilities; how to set the level of capital and calibrate various asset classes and insurer may invest in; and how insurance companies should be managed and governed.

The Commission said that it had taken into account the fact that insurers are "the largest institutional investors" in European financial markets when finalising its rules; adding that it was "crucial" that any new prudential regulation not "unduly restrain insurers' appetite for long-term investments, while properly capturing the risks". Capital requirements for long-term investments had, however, "only been considered where there is a clear empirical case within the calibration standards applicable under Solvency II" allowing it to do so, the Commission said.

Amongst the "high-quality" securities granted concessions under the Commission's new rules are those "fully, unconditionally and irrevocably guaranteed by the European Investment Fund or European Investment Bank", to which a 0% risk charge will be applied. Favourable treatment will also be extended to investments in closed-ended, unleveraged investment funds, including specialist infrastructure funds; while infrastructure project bonds will be treated as corporate bonds of the same rating for the purposes of the new rules.

The implementing rules also set out simplified provisions for smaller and less complex insurers. These include simpler methods for calculating technical provisions and capital requirements, and less stringent reporting requirements.

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