S&P delivers verdict on insurer role in infrastructure

Insurance companies are well placed to fill a $500bn annual gap between infrastructure investment needs and the lending available from traditional sources such as banks, according to research published by S&P RatingsDirect.

Credit analyst Marco Sindaco in London notes in his latest analysis that there is an estimage of $3.4trn in annual infrastructure investment needs through 2030, and it is to these needs that there is an ongoing gap in funding.

However, insurance companies with long term liabilities can see benefits in ties to infrastruture projects, which are long term in nature, and designed to provide broader economic benefits.

A key question in this relationship arises because of regulatory developments. This causes uncertainty for long term investors, and requires analysis of the impact on the insurance company’s financial strength and capital structure.

However, through additional research involving S&P and the Judge Business School at Cambridge University, it has been found that regulatory developments such as Solvency II in the EU will not necessarily cause problems for insurance companies seeking to invest in infrastructure.

“Insurers have been increasing their investment in infrastructure recently despite the sector publicly expressing its general dissatisfaction with the level of capital requirements required for infrastructure investments under the new
European prudential regulation commonly known as Solvency II.”

“Many insurers state that these requirements will limit the industry’s ability to invest in the asset class and, consequently, may impede economic recovery in Europe. However, new research … reveals that the new regulation may not prove as negative as it may first appear. In fact, rather than hinder further infrastructure investment, Solvency II may, for some institutional investors, boost this asset class,” S&P wrote.

In particular, the ratings agency through the Judge Business School research concludes that:

   – We believe Solvency II is more favorable than Solvency I for infrastructure investments. And insurers with approved internal models could be the main beneficiaries.

   – We consider the effect of Solvency II on such investments is wider than how the standard formula is calibrated. In our view, Solvency II has other features that could stimulate infrastructure investments.

   – What’s more, Solvency II should promote more disciplined investment in infrastructure by insurers.

To read the full analysis, click here:

 [asset_library_tag 7972,Investing in Infrastructure]

[asset_library_tag 7973,Solvency II – A double edged sword]

 

 

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