Infrastructure investment for insurance companies under Solvency II

Infrastructure assets offer a wide spectrum of risk and expected return profiles, and help provide diversification away from existing asset classes typically invested in by insurers. Where the risk profile is fully understood and deemed acceptable, the combination of relatively stable long-term, inflation-protected cash flows and attractive spreads mean long-dated project finance debt could provide a good match for certain insurance liabilities. The current draft proposal for the treatment of infrastructure investments under Solvency II paints infrastructure investing with an overly broad brush and misses an opportunity to distinguish between the diverse styles of infrastructure investing that carry very different expected risk-return profiles. This treatment of the infrastructure sector may make it more difficult for European insurers to access the stable and relatively predictable long-term cash flows provided by infrastructure assets at the lower end of the risk spectrum.

This article, jointly written with J.P. Morgan Asset Management, discusses infrastructure investments and considers the suitability of these investments as an asset class backing insurance liabilities, including their proposed treatment under Solvency II.