The introduction of Solvency II has led many insurers to reevaluate a range of strategic questions. One such consideration for insurers is whether their existing investment strategies remain optimal, or even appropriate, under Solvency II.
Investment strategies can change for a variety of reasons. The change from Solvency I to Solvency II is a sufficient change in the regulatory environment to have material knock-on implications for investment strategy. The key drivers of this are probably threefold:
1. Changes in the liability valuation basis under Solvency II have resulted in a change to the liability profile.
2. Relaxing of asset restrictions that were in place under Solvency I but are replaced by the Prudent Person Principle under Solvency II.
3. Capital requirements are now different under Solvency II.
In addition to these key drivers, there are many factors that can influence investment strategy. For example, market conditions have changed and risk appetite may have changed.
Milliman consultants Kevin Manning and Eamon Comerford carried out an analysis of the potential return for a range of assets compared with their Solvency II Standard Formula Solvency Capital Requirement. They explore how closely these capital requirements aligned with the risks underlying those assets. Kevin and Eamon also considered a number of alternative assets that may be interesting to insurers, as well as different risk mitigation options.
To read more about investment strategy under Solvency II, read the report “Investment strategy under Solvency II”.