Insurers move trillions in capital – but the crucial question is not only where they want to invest, but also where they are allowed to invest under regulatory law. This is because it is not the return alone that determines allocations, but the capital burden under Solvency II. While the EU provides incentives for investments via the Long-Term Equity (LTE) regime, the United Kingdom uses the Matching Adjustment (MA) route via debt structures. Two systems, one goal: to channel insurance capital into the real economy and the energy transition.
Europe: Long-Term Equity – a lever on the equity side
Since 2019, the EU has allowed a special capital regime for long-term holdings as part of Solvency II. The so-called Long-Term Equity (LTE) reduces the solvency capital requirement (standard approach) from 39% to 22%.
The logic: If an insurer credibly demonstrates that it holds a stake for at least five years and classifies it in a separate LTE portfolio, the risk of short-term volatility is lower. This is rewarded with a significantly reduced capital deposit.
In practice, funds with an equity character in particular benefit from this – in the real assets sector, for example, infrastructure equity or private equity. The latest development (see previous column) could give LTE a further boost: In the past, the insurer had to carry out a complete review of each individual asset in the fund for LTE qualification. This meant enormous data and administrative effort. LTE may now be applied directly at fund level .
This is a considerable relief for insurers: allocations become clearer, solvency reports (QRTs, SFCR) simpler, and fund investments can be treated as a building block from a regulatory point of view. For product providers, this opens up the opportunity to structure funds in a targeted manner in an LTE-capable manner – and thus become much more attractive in sales. The effect is tangible: for an investment of €100 million, the insurer only has to deposit €22 million in capital (LTE module) instead of €39 million (standard approach).
UK: Matching Adjustment – a lever on the debt side
The situation on the other side of the English Channel is completely different. Solvency UK, the British variant after Brexit, has fundamentally reformed the Matching Adjustment (MA) in 2024.
The principle: Insurers are not only allowed to apply the risk-free interest rate when assessing their liabilities, but also to add part of the spreads of their assets – provided that the cash flows are long-term, stable and match the payment obligations exactly.
An example: A life insurance policy has to pay out €100 million in 20 years. Without an employee, the discount is 2% → present value: €67 million. With an infrastructure bond that yields 4%, a spread of 150 basis points can be credited. Discounted at 3.5% (MA is added to the risk-free rate) → present value: €50 million. So mathematically: discount rate = risk-free interest rate + (spread-fundamental spread). The result: liabilities are declining on the balance sheet, the capital requirement is being reduced.
This is exactly where the 2024 reform (PRA Policy Statement PS10/24) comes in: For the first time, assets with “highly predictable cash flows” may also be included in the MA portfolio – up to 10% of the benefit. This opens the door for more infrastructure debt, loans and long-term bonds.
Historically, the MA has been a concession to the large British life insurance market in the past. But while it exists in the EU under Solvency II in narrow approaches, but is hardly used, the United Kingdom has massively pushed ahead with flexibilization after Brexit. In the meantime, MA has become a central control instrument there.
Two different paths, one common goal
The comparison shows a clear pattern:
- EU (Solvency II): Focus on equity. LTE makes it easier to invest in infrastructure and private markets from a regulatory point of view.
- UK (Solvency UK): Focus on Debt. MA makes debt instruments with stable cash flows more attractive.
The goal is identical: the insurers’ gigantic capital pots are to flow into the Green Deal, the energy transition and infrastructure projects . The paths differ – once via equity, once via debt capital.
What does this mean for product providers and asset managers?
The requirement to incorporate these mechanisms into product design and actively address them in sales has increased considerably. Arguments are still often based solely on fund returns – but not on the insurer’s return on equity, a parallel problem to credit institutions that are also regulated by equity. This view is outdated. Insurers as well as credit institutions calculate regulatory.
Results:
- Solvency II (LTE) and Solvency UK (MA) have long been instruments of industrial policy control – not just security regimes.
- EU (LTE): Relief on the equity side.
- UK (MA): Flexibilization on the debt side.
- For product providers: Those who take solvency mechanisms into account in the design and communicate them in sales gain a structural advantage.
