Green Infrastructure Investment— Implications for Insurance Regulators Jobst (2018) Green Infrastructure Investment—Implications for Insurance Regulators 1 Regulatory Treatment of Infrastructure Investment by Insurance Companies Enabling regulatory environment is fundamental to mobilizing long-term finance for infrastructure investment … Most EMDEs require more private investment in infrastructure to enhance resilience Maximizing Finance for Development ”Climate-smart” infrastructure helps reduce carbon footprint of economic progress Infrastructure Investment Natural match for life insurers’ liabilities-driven investment: predictable and stable cash flows, with low correlation to other assets Self-insurance: mitigate transition risk on existing assets that support insurers’ current liabilities (“stranded assets”) Most insurance regulations do not treat infrastructure as distinct asset class High capital charges for long-term debt investments, esp. for unrated transactions In most countries, data constraints have limited scope of possible differentiation Jobst (2018) Green Infrastructure Investment—Implications for Insurance Regulators 2 Overview of Insurance Solvency Regimes—Regulatory Treatment of Infrastructure Overview of Current Regulatory Treatment of Infrastructure Finance in Insurance Solvency Regimes in G-20 Countries* (status as of October 2018) 1/ Group 1 (different capital charge) 2/ Group 2 (different capital charge under review) 3/ Group 3 (some non-capital differentiation) 4/ Group 4 (no differentiation) Jobst and Menville (forthcoming). Note: */includes also Bermuda, Guernsey, Hong Kong SAR, and Singapore as important offshore financial centers (OFCs), all non-G20 EU countries, Norway (which adopted the EU Solvency II Directive), and Switzerland as important jurisdiction for insurance activities; 1/ Country Group 1 (dark green): countries with a reduced capital charge for rated/unrated infrastructure debt and/or equity (Bermuda (equity only), P.R. China (equity and debt), European Union (equity and debt), Norway (equity and debt) and South Korea (debt in social overhead projects only)); 2) Country Group 2 (light green): countries where a reduced capital charge for rated/unrated infrastructure is under discussion (Hong Kong SAR (under review), Singapore (RBC 2 Review – Third Consultation), South Africa (QIS 3 Consultation)); 3) Country Group 3 (light blue): countries with some (but incomplete or non-capital) differentiation of infrastructure finance (Argentina (up to 40% in PPP projects), Australia (additional property stress applied to earning yield associated with infrastructure assets), Brazil (removal of restriction of infrastructure finance), Canada (infrastructure investments without contractually fixed cash flows), India (min. portfolio allocation in infrastructure bonds of 15%); 4) Country Group 4 (red): no differentiation (all other G-20 countries (Indonesia, Mexico, Japan, Russian Federation, Saudi Arabia, Switzerland, Turkey, and United States) and Guernsey. Jobst (2018) Green Infrastructure Investment—Implications for Insurance Regulators 3 Moody’s published a series of reports on the credit performance of infrastructure finance … Jobst (2018) Green Infrastructure Investment—Implications for Insurance Regulators 4 Credit Risk Profile—Green Infrastructure Investment We find a high degree of resilience of project loans in both advanced and developing countries, esp. for green investments … Corporate EMDEs Source: Jobst (2018 and forthcoming), Levy (2017 and 2018), and Moody's Investors Service. Note: "green" denotes project finance in industry sectors that meet the use-of-proceeds eligibility criteria of the Green Bond Principles. Jobst (2018) Green Infrastructure Investment—Implications for Insurance Regulators 5 Differentiated Capital Charge—Green Infrastructure Investment … which would translate into lower capital charges to reflect the actual credit risk profile, fully consistent with regulation. Source: Jobst (2018 and forthcoming), Levy (2017 and 2018), IAIS, and Moody's Investors Service. Note: "green" denotes project finance in industry sectors that meet the use-of-proceeds eligibility criteria of the Green Bond Principles; */ calibrated using a single factor model consistent with Vasiček (with actual default and recovery rates); **/ currently in field-testing, to be adopted after the end of 2019. Jobst (2018) Green Infrastructure Investment—Implications for Insurance Regulators 6 Insurance regulators may want to assess the adequate calibration of capital charges for infrastructure finance. Evaluation of the Effects of Financial Regulatory Reforms on Infrastructure Finance (Consultative Document) Source: Financial Stability Board (July 18, 2018), available at http://www.fsb.org/wp-content/uploads/P180718.pdf Jobst (2018) Green Infrastructure Investment—Implications for Insurance Regulators 7 … which is consistent with G20 EPG recommendation on prudential policies supporting infrastructure finance … Report of the Eminent Persons Group Report of the G20 Eminent Persons Group on Global Finance Governance Source: G20 Eminent Persons Group (EPG), 2018, “Making the Global Financial System Work for All” (October), available at https://www.globalfinancialgovernance.org/assets/pdf/G20EPG-Full%20Report.pdf. Jobst (2018) Green Infrastructure Investment—Implications for Insurance Regulators 8 … and also addresses an important item on the SIF Agenda for 2019. Sustainable Insurance Forum: Building Resilient Economies Jobst (2018) Green Infrastructure Investment—Implications for Insurance Regulators 9 Thank you! Jobst (2018) Green Infrastructure Investment—Implications for Insurance Regulators 10 References Main References Jobst, Andreas A., 2018, “Credit Dynamics of Infrastructure Investment: Considerations for Financial Regulators,” Policy Research Working Paper No. 8373, March 22 (Washington, D.C.: World Bank Group), available at http://documents.worldbank.org/curated/en/606411522326750586/pdf/124720-PUBLIC-Infrastructure-Regulation-Report-Mar28.pdf. Levy, Joaquim, 2017, “Risk and Capital Requirements for Infrastructure Investment in Emerging Market and Developing Economies ,” Feature Story, December 22 (Washington, D.C.: World Bank Group), available at http://www.worldbank.org/en/news/feature/2017/12/22/risk-and-capital-requirements-for-infrastructure-investment-in-emerging-market-and- developing-economies. ______, 2018, “Pathways to Climate Resilient Critical Infrastructure in the 21st Century,” Remarks at the 2018 Extreme Events and Climate Risk Forum, Geneva Association, September 18 (Toronto), available at http://www.worldbank.org/en/news/speech/2018/09/18/pathways-to-climate-resilient-critical-infrastructure-in-the-21st-century. Related Literature EIOPA, 2015, “Infrastructure Investments by Insurers,” Discussion Paper No. CP-15-003, March 27 (Frankfurt am Main: European Insurance and Occupational Pensions Authority), available at https://eiopa.europa.eu/Publications/Consultations/EIOPA-CP-15-003_Discussion_paper_on_Infrastructure_Investments_for_public.pdf. European Commission, 2016, “Commission Delegated Regulation (EU) 2016/467 of 30 September 2015 Amending Commission Delegated Regulation (EU) 2015/35 Concerning the Calculation of Regulatory Capital Requirements for Several Categories of Assets Held by Insurance and Reinsurance Undertakings,” Official Journal of the European Union L 85/6, April 2 (Brussels: European Commission), available at http://data.europa.eu/eli/reg_del/2016/467/oj. ______, 2017, “Commission Delegated Regulation (EU) 2017/1542 of 8 June 2017 Amending Delegated Regulation (EU) 2015/35 Conce rning the Calculation of Regulatory Capital Requirements for Certain Categories of Assets Held by Insurance and Reinsurance Undertakings (Infrastructure Corporates),” Official Journal of the European Union L 236/14, September 14 (Brussels: European Commission), available at http://data.europa.eu/eli/reg_del/2017/1542/oj. IAIS, 2017, “Public 2017 Field Testing Technical Specifications (Instructions for the May 2017 Quantitative Data Collection Exercise),” July 21 (Basel: International Association of Insurance Supervisors), available at https://www.iaisweb.org/file/67655/public-2017-field-testing-technical-specifications. OECD, 2015, “Infrastructure Financing Instruments and Incentives 2015,” Directorate for Financial and Enterprise Affairs (Paris: Organization for Economic Co-operation and Development), available at http://www.oecd.org/finance/private-pensions/Infrastructure-Financing-Instruments-and-Incentives.pdf. Schwartz, Jordan Z., Ruiz-Núñez, Fernanda and Jeff Chelsky, 2014, “Closing the Infrastructure Finance Gap: Addressing Risk,” in: Heath Alexandra and Matthew Read (eds.) Financial Flows and Infrastructure Financing. Conference Proceedings, March 20-21 (Sydney: Reserve Bank of Australia), available at https://www.rba.gov.au/publications/confs/2014/pdf/conf-vol-2014.pdf. 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