Blog: How solvency reforms shape investment strategy?

The European Union’s revision of the Solvency II Directive and the UK’s introduction of Solvency UK reflect a strategic pivot to release capital for long-term, productive finance.

These reforms are designed to enhance capital efficiency and encourage investment in alternative assets such as private equity, infrastructure, and private credit.

The UK government’s parallel push for domestic investment adds complexity, aligning regulatory reform with national economic objectives like infrastructure development, housing, and green energy.

Capital efficiency: revised treatment of alternative assets

Under the original Solvency II framework, alternative investments were heavily penalised, with capital charges as high as 49%, particularly for unlisted equities and opaque fund structures. The reforms introduce more nuanced classifications that significantly reduce these charges:

Asset type	Previous charge	Revised charge	Conditions
Type 2 equities (e.g. private equity, emerging markets)	49%	49%	No change unless reclassified
Long-term equity investments (“LTEI”)	49%	22%	Must be held ≥5 years and governed by long-term policy
Qualifying infrastructure	49%	30%	Must be EEA or OECD-based with predictable cash flows
Infrastructure corporates	49%	36%	Revenue must derive from infrastructure assets

These changes materially improve the capital efficiency of long-duration, illiquid investments. LTEI-classified equities benefit from a dramatically lower capital charge of 22%, compared to 49% for Type 2 equities. This 27 percentage point difference is a game changer for insurers and asset managers aiming to leverage capital efficiency, especially when investing in private markets or long-horizon strategies that meet LTEI criteria.

However, uptake remains limited, with only 4% of insurers currently applying LTEI classification.

The treatment of Type 2 equities remains unchanged under Solvency UK because these assets such as private equity, unlisted shares, and hedge funds, are considered higher risk and less transparent, often lacking look-through data. While Solvency UK introduces more flexibility in other areas, the Prudential Regulation Authority (“PRA”) has retained the 49% capital charge for Type 2 equities to reflect their volatility and illiquidity. Instead of revising this category, the PRA has introduced targeted preferential treatments for specific equity types like qualifying infrastructure and strategic equities, which meet stricter criteria for long-term investment and transparency.

Solvency UK: principles-based flexibility and strategic complexity

Solvency UK introduces a more flexible, principles-based regime tailored to the UK’s economic context. Key features include:

Expanded Matching Adjustment (“MA”): Now includes sub-investment grade private debt and prepayable loans, provided they exhibit highly predictable cash flows.
Internal credit assessments: Allows responsive capital cushions to evolving risks. Insurers can assess unrated assets internally, enabling bespoke credit strategies.
Capital add-on flexibility: Allows dynamic adjustments to reflect evolving risk profiles.
Internal models: Replaces prescriptive rules with tailored capital treatment based on firm-specific risk. So allows shifting from rigid rules to firm-specific calibration.

These reforms offer insurers greater strategic latitude but demand enhanced governance, data transparency, and alignment with long-term liability structures.

Government-led investment priorities

The UK government has explicitly linked Solvency UK reforms to its broader economic agenda. Key policy drivers include:

£100bn capital release: HM Treasury estimates that reforms could release over £100bn in insurer capital for domestic investment.
MA Investment Accelerator: Designed to reduce barriers to UK-centric investment such as housing, digital infrastructure, and renewables.
Regulatory streamlining: Aims to cut administrative costs by 25% and consolidate overlapping regulatory bodies and reduce compliance burden.

This dual mandate requires insurers to maintain solvency while actively supporting national investment priorities.

The rest of the world

Other jurisdictions including the U.S., UAE, Singapore, Japan, and Bermuda are aligned with Solvency II principles. Bermuda, in particular, received full Solvency II equivalence in 2016, and its insurers now hold around $404 billion in capital and $1.87 trillion in total assets. The global shift toward Solvency II principles signals alignment pressure across these markets.

Strategic asset allocation shifts

The reforms encourage insurers to reallocate capital towards alternative assets with improved regulatory treatment:

Private equity

Eligible for LTEI classification, offering significant capital relief.
Favours funds domiciled in EEA or OECD jurisdictions with transparent structures.
Requires demonstration of long-term investment intent and governance.

Infrastructure

Renewable energy, digital infrastructure, and transport assets benefit from preferential treatment.
Supports ESG and impact investing goals.

Private credit

Sub-investment grade debt and real estate-backed loans now qualify for MA portfolios.
Internal models allow for granular risk calibration and tailored origination.

Real assets

Real estate, timberland, and social infrastructure benefit from broader definitions and reduced capital drag.
Look-through requirements remain a challenge, necessitating stronger data partnerships.

Operational and governance requirements

To fully benefit from the reforms, insurers must invest in:

Data infrastructure: Enables look-through capability and asset-level transparency.
Governance frameworks: Must reflect long-term holding intent and risk alignment.
Asset-liability matching: Portfolios must be precisely matched to liabilities to qualify for MA and LTEI treatment.

Cross-border divergence in regulatory interpretation adds complexity, particularly for multinational insurers.

Market-level impact

The reforms have the potential to catalyse significant capital reallocation:

€850bn across Europe could be released if insurers align with pension fund allocations to alternatives.
£100bn in the UK could be redirected toward productive finance, supporting infrastructure and innovation.

This marks a pivotal moment for insurers, asset managers, and family offices to embrace long-term, illiquid, and impact-oriented investing.

How we enable strategic transition

Our investment advisory division is well-positioned to support insurers through this regulatory transition. With deep expertise in both Solvency II and Solvency UK frameworks, we offer a comprehensive suite of services:

1. Portfolio structuring for capital efficiency

Reclassifies eligible assets to meet LTEI and MA criteria.
Structures investments in private equity, infrastructure, and private credit to align with regulatory definitions.

2. Regulatory alignment and internal model support

Develops and refines internal models to reflect true portfolio risk.
Supports governance compliance, stress testing, and supervisory documentation.

3. Manager engagement and transparency enablement

Facilitates look-through capability and data transparency.
Integrates ESG metrics, climate risk analysis, and long-term investment governance.

By leveraging our integrated advisory capabilities, insurers can access new investment opportunities, align with regulatory expectations, and contribute meaningfully to national economic goals, while maintaining solvency and operational resilience.