Solvency II lumbers over the horizon


September 5, 2014

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Like some regulatory behemoth, Solvency II continues to lumber over the horizon.

This European Union directive is set to come into effect on 1 January 2016 and will force insurers to make sure they have enough money set aside so they can cover all of the claims they are likely to receive. The idea is to guarantee that insurers can meet their obligations; and insurers and governments are now making sure they are ready.

But, like most legislation, Solvency II is set to have effects that the lawmakers aren’t expecting. That’s where wind investors come in.

Insurance Europe, which represents the continent’s insurers, has warned that the regulations will mean that insurers have less to invest in long-term infrastructure projects, including wind farms.

These schemes tend to be popular with long-term institutional investors because they usually benefit from stable subsidies; and because countries are struggling to cope with pressures to produce more energy, particularly from renewable sources.

So why would a new piece of regulation affect that appetite?

Well, insurers say they would end up holding inappropriately high levels of capital against their long-term investments. This is set to make it more expensive to invest in growth-stimulating activities, like infrastructure projects including wind farms.

Let’s imagine that Solvency II does make investment in wind farms look less attractive. Clearly, an exodus by the insurance industry from wind sector would clearly be no good thing.

European insurers manage assets worth €8.5trn, including bonds, company shares, and other assets. Insurers are an investment powerhouse that wind could ill afford to lose. However, any prediction of doom for wind farms is still very premature.

We don’t yet know how wind farms are going to be treated under the regime. They may be treated as land and buildings, or they may be treated as infrastructure. We just don’t know.

We also don’t know how national governments will structure their own policies. The UK Treasury, for example, is currently in consultation on the final elements of its Solvency II policies, which is due to close on 19 September. These plans are still in flux.

And even if developers of onshore and offshore schemes do find life a bit tougher after the introduction of Solvency II, we don’t expect anything earth-shattering. Sure, it may be more difficult to get money to fund early stages of schemes. Some may not happen.

In general, though, we feel good schemes will be able to attract investment, and it is only the marginal schemes that would lose out under Solvency II. Developers are an entrepreneurial bunch who are financially inventive enough to make schemes happen.

There are also those who could benefit. Less competition from major institutions surely means more opportunities for the sector’s smaller private investors. This is something that, in theory at least, could foster future growth.

We clearly need to heed wind and insurance industry warnings here but we currently see little evidence that Solvency II will make any huge difference. It may be a bump in the road. Nothing more.

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