Insurer estimates Solvency II debt charge could be 15-18%

Formulas confirm smaller capital charge for debt than direct property

Solvency II formulas could require EU insurers to make a 15-18% capital charge against typical commercial real estate loans, preliminary estimates by a leading UK insurer suggest.

Under the proposed formula, a typical, unrated, ordinary five- to-seven-year senior loan could carry this charge.

The capital requirement for direct property is 25% and for property equities 39%, making debt relatively attractive for insurers.

The European Insurance Occupational Pensions Authority (EIOPA), which supervises European insurers, clarified the terms for commer-cial property last October in an unpublished document.

The basic treatment of commercial real estate loans is unchanged, in that the weighting is calculated against a complex matrix of features.

Not only are characteristics of the asset backing the loan, such as building quality and tenant covenants, included, but also the credit rating of the loan/borrower and its duration.

Unrated loans – the majority of UK commercial real estate borrowing – would carry heavier weightings than rated debt.

Solvency II rules also increase the capital charge  as the duration of the loan lengthens.

Insurers can use internal models to calculate their capital requirements and may try to get the charge even lower. But to get regulatory approval, firms must have a strong track record and the data to back up their model.

EIOPA has also published  its advice to the European Commission on extending and integrating Solvency II rules into pan-European pension regulations.

The advice is based on consultation responses to a draft document published late last year.

The UK’s National Association of Pension Funds has attacked the advice, as it had hoped the extension to pension schemes would be dropped.