Solvency II reforms: equity vs fixed income make sense for European insurers – but execution is key, Aberdeen finds

• Rule changes in January 2027 give insurers in continental Europe opportunity to significantly improve return on capital when investing in equity across public and listed private markets

• Revised rules allow insurers to rebalance underlying assets while maintaining LTEI eligibility and meeting regulatory requirements 

• Rule changes relevant only to continental Europe under Solvency II and does not apply to UK insurers under Solvency UK

• Illustrative Aberdeen analysis shows diversified LTEI portfolio across public and private markets could target attractive expected equity market returns, with capital cost comparable to 10-year investment grade corporate bonds

Solvency II has weighed on European insurers’ public and private equity exposure, as high capital charges tilted portfolios towards fixed income. 

Aberdeen Investments has today published new analysis setting out how upcoming reforms to the Solvency II long‑term equity investment (LTEI) framework could materially reshape insurers’ approach to equity allocation, capital efficiency and investment in the real economy while improving long-term returns to clients. Crucially, it’s all in the implementation, and Aberdeen Investments sets out recommendations on how the objectives can be delivered on. 

In a new report exploring the opportunity for insurers from the revised LTEI framework, Aberdeen believes that the changes due to come into force in January 2027 represent one of the most significant opportunities in years for European insurers to increase equity exposure across both public and private markets, while maintaining strict balance sheet discipline and regulatory compliance.

James Budenberg, Senior Director – Strategic Insurance Group, at Aberdeen Investments, says: 

“Solvency II has historically made equities an expensive proposition for insurers, even where the investment case was compelling. 

“The revised long‑term equity framework marks a decisive shift, recognising insurers’ ability to act as genuinely long‑term investors and giving them access to equity‑like returns at a capital cost comparable to long‑dated investment grade credit. 

“These reforms have the potential to change strategic asset allocation across the sector, but the benefits will only be unlocked by portfolios that are deliberately structured, diversified and sized through an insurer-focused lens. Implemented well, this is the best opportunity for European insurers in years to increase equity exposure.”

The current path

Under the current Solvency II standard formula, insurers allocating to equities face market risk capital charges of around 39% to 49%, depending on classification. While this has not prevented insurers from holding equity exposure altogether, it has often made such allocations hard to justify when assessed on a return on capital basis compared with fixed income. 

Recognising the long‑term nature of insurance liabilities and insurers’ role as patient capital providers, policymakers previously introduced the LTEI category, offering capital requirements as low as 22%. 

However, Aberdeen notes that the original rules were restrictive and operationally difficult to meet, resulting in adoption by only a small minority of Solvency II‑regulated insurers.

A new way forward – ‘a fund of one’

With the changes coming into force, Aberdeen Investments believes insurers can use dedicated long term equity structures to bring together public and private market exposures in a way that is aligned with their balance sheet, risk appetite and capital objectives. 

This can be achieved either through a bespoke “fund of one” tailored to a single insurer, or through a commingled LTEI compliant fund that offers greater scale and operational efficiency.

Greater flexibility for insurers

One of the most important changes in the revised LTEI rules is the expanded ability to qualify at the fund level rather than assessing every underlying asset individually. Under the new framework, closed‑ended alternative investment funds, European long‑term investment funds, and qualifying venture capital and social entrepreneurship funds can be treated as LTEI in their own right, as long as broader regulatory conditions are met. 

This fund level qualification gives insurers far greater flexibility, allowing them to rebalance and rotate underlying assets within a portfolio while maintaining LTEI eligibility and continuing to meet regulatory requirements. 

Building blocks of effective LTEI portfolio

Illustrative analysis from Aberdeen shows how a diversified LTEI portfolio across public and private markets could target attractive expected equity market returns with a capital cost comparable to a 10-year BBB-rated corporate bond.

Aberdeen’s analysis shows that, by diversifying across public and private equity assets rather than relying solely on developed market listed equity*, the illustrative LTEI portfolio could achieve an expected return approximately 8.7% higher per year** than a traditional developed market equity allocation over 10 years, without any increase in capital requirements under the revised framework.

The illustrative LTEI portfolio is a diversified public & private equity portfolio made up of around 30% listed equities (comprising Japanese, Pacific (ex-Japan) and US equities), 43% core infrastructure listed equity and 27% private equity (both venture capital and buyout strategies). 

The portfolio was optimised using Aberdeen's 10-year long-term expected returns as at H1 2026, targeting maximum return for the same level of volatility as Global equities, as represented by the MSCI World (Developed Markets) index. The resulting expected return for the LTEI-optimised portfolio is 11.5% per year, compared to 2.8% per year for the MSCI World (Developed Markets) index. 

Aberdeen identifies infrastructure equity, private equity and listed equities as the core building blocks of an effective LTEI portfolio. Infrastructure equity provides resilient long‑term cash flows, inflation linkage and diversification, while private equity – including growth equity, buyouts and qualifying venture capital funds – becomes increasingly attractive under LTEI due to its higher expected returns and access to business models not typically found in public markets. 

Listed equities continue to play an important role in providing global diversification and exposure to long‑term equity return drivers, provided investments are structured to meet LTEI requirements.

Compelling opportunity for European insurers

The incoming changes to the LTEI requirements present a compelling opportunity for European insurers.

To access this opportunity effectively, insurers will need to combine a clear understanding of the new LTEI rules, an ability to size a position relative to the prescribed stress tests and meet ongoing reporting requirements, and the ability to optimise a portfolio through an insurance balance-sheet lens, across private equity, venture capital, infrastructure and listed equities. 

Aberdeen is well-placed to support insurers in navigating this opportunity, combining deep insurance-specific expertise with a long track record in constructing public and private markets portfolios across asset classes.

Aberdeen's Strategic Insurance Group works with insurers globally on balance sheet‑aware investment solutions, bringing together actuarial, regulatory and investment expertise.

Ends

* MSCI World (Developed Markets) Index, used as a volatility reference only and is not a benchmark.

**Source: Aberdeen, December 2025. Expected returns and volatility based on Aberdeen 10-year capital market assumptions as at 31 Dec 2025. MSCI World (Developed Markets) Index used as volatility reference only and is not a benchmark. Illustrative portfolio shown for discussion purposes only; actual outcomes will depend on portfolio design and insurer‑specific calibration.

Media enquiries 

Jemma Jackson
Head of Campaigns and Media, Aberdeen
jemma.jackson@aberdeenplc.com
07776 204 610

Yoosof Farah
Campaigns and Media Relations Manager, Aberdeen
yoosof.farah@aberdeenplc.com 
07345 441 771

Notes to editors

About Aberdeen Investments:

With our origins in an insurance company, insurance asset management is central to our heritage. 

Today, Aberdeen operates as an independent global insurance asset manager with more than 150 insurance clients worldwide for whom we manage over €229 billion in assets across credit, multi-asset, quantitative index strategies, and real assets.

www.aberdeeninvestments.com

About Aberdeen Group

Aberdeen is a leading Wealth & Investments group, working to help millions of customers and clients turn their financial goals into reality. As at 31 December 2025, Aberdeen managed and administered c.£556bn of client and customer assets across its three core business, interactive investor, Adviser and Investments.

www.aberdeenplc.com 

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