BPF calls for reform of Solvency II regulation to unlock institutional investment into UK towns and cities and drive levelling up
- Consultation response highlights need to change to outdated methodology for assessing risk of insurers owning real estate
- Proposal to cut 25% Solvency Capital Requirement for real estate assets to 10% or lower
The British Property Federation (“BPF”), in collaboration with the Association of Real Estate Funds (“AREF”), European Association for Investors in Non-Listed Real Estate Vehicles (“INREV”) and the Investment Property Forum (“IPF”), is calling for significant reform of the Solvency II regulation in order to unlock the institutional capital needed to drive levelling up and fund the decarbonisation of the built environment
The EU Solvency II Directive came into force in 2016 and introduced capital requirements for insurers and reinsurers to protect beneficiaries from the risk of insolvency.
In its response to an HM Treasury consultation the BPF, as part of the industry-wide working group, argues that the current Solvency Capital Requirement (“SCR”) for investment in property is based on a worst-case short-term downside scenario and overstates the potential risk for long-term life insurers.
Its submission to HM Treasury calls for:
- A new methodology for calculating a real estate volatility and risk, based on a long-term rather than short-term holding
- A cut in UK insurers’ property SCR from 25% to 10% or lower, reflecting the long-term horizon of real assets investment
- Insurers to have the flexibility to decide on a case-by-case basis whether a fund should be treated for Solvency II purposes as property or as long-term equity.
The BPF highlights that the current SCR of 25% was calculated based on MSCI data on real estate valuations over a one-year period during the Global Financial Crisis, which saw exceptional levels of volatility. It cites evidence from EIOPA, which shows that insurers hold real estate assets for an average of 14 years and would typically continue to hold assets through market cycles or a short term ‘crash’. On that basis, it proposes that valuations data over a 10 or 15-year period is used as a basis for calculating the SCR.
This more nuanced approach would mean a significant reduction in the SCR to 10% of lower, making it more attractive for insurers to fund long-term regeneration and unlocking billions of pounds to be invested in UK towns and cities.
Ion Fletcher, Policy Director at British Property Federation, commented:
“One of the flaws of the Solvency II regulation is that by treating property as a short-term asset, it overstates the risks of property investment for long-term owners. A new methodology, which takes into account the long-term, sometimes generational nature of insurer investment into real assets and infrastructure, would not only more closely reflect reality, but could also unlock billions of pounds of investment to transform UK towns and cities. Government has talked about unleashing private capital for levelling up; a full examination of the Solvency II is one such opportunity.”
Paul Richards, Managing Director at the Association of Real Estate Funds, commented:
“AREF fully supports reforms to Solvency II and, along with other real estate associations, has proposed changes to enable the insurance sector to unlock substantial funds for investment in real estate and similar illiquid assets. Real estate is an attractive asset class for life insurers due to its liability matching characteristics and predictable income streams in the form of rents. By enabling the insurance sector to invest more in these types of assets, this could attract much needed additional capital for regeneration, infrastructure and housing which would assist the government in meeting its levelling up agenda for the UK.”
Melville Rodrigues, Head of Real Estate Advisory at Apex Group, coordinator of the working group that included members from BPF, AREF, INREV and IPF commented:
“I am delighted the real estate industry associations are aligned on this key issue. Their submissions send a powerful message that the industry is committed to driving long-term and sustainable growth in partnership with institutional investors.
“The proposed reforms to Solvency II can be a gamechanger in delivering levelling up and the transition to a greener economy by releasing significant capital held by life insurers.
“I look forward to HM Treasury and the Prudential Regulation Authority engaging constructively with the associations to unleash our real estate’s entrepreneurial DNA: by doing so, we will enhance policyholder protection by increasing investment into productive capital and making opportunities more equal across the UK.”
