Are European insurers leaving capital on the table?
We sat down with Alexander Roth, Head of Capital & Operational Solutions International at Howden Re, and Craig Turnbull, Partner, Insurance Practice at Barnett Waddingham, to discuss a capital efficiency opportunity that is available to many European insurers today, but that relatively few have acted on.
What is LTEI, and why does it matter?
Craig: Under Solvency II's standard formula, most listed equities attract a capital charge of 39%, and that can swing by as much as ±13% depending on recent market performance through the Symmetric Adjustment mechanism. For an insurer with a material equity allocation, that's one of the largest single contributors to market risk capital requirements, and the volatility in that charge creates real headaches for teams trying to manage solvency ratios within defined target ranges.
The Long-Term Equity Investment framework – LTEI – provides a fundamentally different picture. Where equities qualify, the charge falls to 22% with no Symmetric Adjustment applied. That's a direct, significant capital saving, and it comes with greater predictability. The framework has existed since 2019, but very few European insurers have used it. That is about to change.
Why has it been so underused?
Craig: The original rules were genuinely restrictive. Equities had to be held for ten years, managed separately from other assets, and linked to specific identified liabilities. There was also a structural inconsistency: equities most naturally sit as surplus assets on an insurer's balance sheet, but that was precisely where LTEI treatment was hardest to claim, because there were no specific liabilities to point to. Most insurers concluded it was too complex, or too uncertain, to pursue.
Alexander: Which is why the 2024 Solvency II Review is such a significant moment. The framework has been materially simplified, with the revised rules taking effect across member states from January 2027. The minimum holding horizon drops from ten years to five. The requirement to link LTEI assets to specific liabilities has been removed entirely. And for equities held through eligible fund structures such as ELTIFs and certain AIFs, eligibility can now be assessed at fund level, removing a significant operational burden. The structural barrier that blocked adoption for most insurers has been lifted.
How material is the opportunity in practice?
Alexander: We recently worked through this with a European insurer as part of a broader capital efficiency exercise. They held around €400m of equity exposure, roughly 8% of their non-linked asset portfolio, generating an equity SCR of approximately €168m under standard treatment. Reviewing the portfolio against LTEI eligibility criteria, we estimated that around €230m could qualify, reducing Group SCR by around €30m after diversification.
For an insurer managing solvency coverage within a target range, €30m of freed capital is real optionality – whether that is a shareholder distribution, an acquisition, or further investment in the business. And beyond the immediate saving, LTEI eligibility can support a higher strategic equity allocation over time, including into private markets through eligible fund structures.
What does implementation actually require, and should insurers be moving now?
Craig: LTEI eligibility requires a documented investment policy that demonstrates the intent and ability to hold equities for at least five years, including under stress conditions. That policy needs to define the scope of the LTEI portfolio clearly, address liquidity under stress explicitly, and be fully integrated with the insurer's ORSA and capital planning framework. It requires both investment and actuarial input to be credible. Governance is equally important. If LTEI conditions are breached, the insurer reverts to standard Type 1 or Type 2 charges, potentially at a moment when markets are already under stress.
Alexander: The regulatory framework is there to be used, but implementing it without robust policies, board sign-off and supervisor engagement creates real risk. Supervisors across Europe are generally open to pre-application engagement now, and engaging early allows firms to test their approach ahead of the January 2027 deadline. If LTEI eligibility supports a higher equity allocation, the investment case for making that shift also needs to be developed alongside the capital case – these workstreams need to run in parallel. Two insurers can hold exactly the same underlying equity assets and use very different amounts of capital to do so. The window to act is open now.
About
Howden Re's Capital & Operational Solutions team takes a holistic approach to helping European insurers strengthen their balance sheets, spanning reinsurance structuring, solvency market risk advisory, investment and ALM frameworks, and legacy portfolio management. Barnett Waddingham, part of the Howden Group, is a leading professional services consultancy with over 36 years of experience and a dedicated insurance practice serving more than 70 insurers across actuarial, regulatory, capital modelling and investment advisory.
Together, the two teams offer European insurers an integrated capability, from strategic ALM and investment policy through to governance frameworks, supervisor engagement and implementation support, helping insurers optimise capital and improve balance sheet efficiency.