The European Commission is amending existing legislation with the aim of encouraging more investment and long-term finance for infrastructure projects by large institutional investors such as insurers and pension funds.

By amending the rules on how much capital insurance companies need to hold, the Commission is giving them incentives to invest for the long-term in infrastructure - the changes will free up millions of euros for new investment.

 The European Investment Bank estimates that the EU may need up to €2 trillion in investment in the period up to 2020. Public support through measures such as the €315 billion Investment Plan for Europe will help, but there is a clear need for more private investment in such projects in the longer term.

According to the Commission, a major source of the investment could come from large institutional investors such as insurers and pension funds, with the insurance industry ideally placed to provide such long-term finance by investing in infrastructure projects. However, many insurers are reluctant to invest in infrastructure because they are obliged to hold a high level of capital against those investments. Currently, EU insurers have approximately €22 billion invested in infrastructure, representing less than 0.3% of their total assets.

The Commission is proposing new legislation to create better incentives for insurers to invest in infrastructure projects, in particular by reducing the amount of capital which insurers must hold against the debt and equity of qualifying infrastructure projects.

If insurers were to increase their investment in infrastructure to even 0.5% of total assets, which the Commission said “seems achievable”, this would mean an extra €20 billion of investment, bringing a boost to infrastructure projects in Europe.

European insurance firms are major investors - almost €9.9trn invested at the end of 2014

Insurance companies are major investors - at the end of 2014, European insurers had almost €9.9 trillion invested on behalf of their policy holders. According to the Commission, the rules that apply to the insurance companies have a major influence on whether or not they decide to take on long-term investments like infrastructure projects.

Currently, an insurance company wanting to invest in a public project such as a motorway would be subjected to the same capital charge as if it invested in any private company - even though infrastructure projects generally benefit from predictable future revenues (like motorway tolls) and therefore have a better risk profile.

In view of this, the Commission has decided to change the rules – known as the Solvency II Delegated Regulation - to give insurance companies better incentives to invest in infrastructure projects.

The amended Regulation introduces a new concept of 'qualifying infrastructure investments' - investments that present better risk characteristics than other infrastructure investments. Insurers will need to hold a lower level of capital against their investment in these infrastructure projects.

Only investments in infrastructure projects that meet the 'qualifying criteria' will benefit from the lower capital charge. The criteria will denote safer infrastructure projects and ensure that insurers understand the associated risks.

In order to qualify for the reduced capital charges, infrastructure projects must be able to generate predictable cash-flows and withstand stressed conditions. The investments can take the form of equities, bonds or loans and the contractual framework of the project should contain provisions to protect investors. Insurers must be able to hold investments in bonds to their maturity.

The European Parliament and the Council now have up to three months to exercise their right of objection, with the possibility to extend the period for another period of three months at their initiative. Either institution also has the right to reject the amendment.