Solvency II unit matching is no longer just a theoretical concept, but rather a common strategy used by UK insurers with material blocks of unit-linked business to help improve liquidity and balance sheet stability, and better manage market risks. This paper by Milliman’s Emma Hutchinson, Fred Vosvenieks, and Paul Fulcher highlights lessons learned from implementations in the UK market and the practical challenges to implementation in other countries.
Solvency II presents an opportunity for insurers with significant blocks of unit-linked business to revise their investment strategies in a way which could provide a significant increase in available liquidity and reductions in market risk. This is achieved using ‘Solvency II unit matching’—the process of more closely aligning the insurer’s holding of unit-linked investment funds with the unit-linked part of the Technical Provisions.
This report by Milliman consultants describes the approach and provides an overview of the theory underlying Solvency II unit matching. Based on insight from implementation experience, the report also highlights the primary benefits of the approach and considers the potential downsides and key implementation considerations.