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Strategic asset allocation for insurers under Solvency II

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  • Roy Kouwenberg

    (Mahidol University
    Erasmus University Rotterdam)

Abstract

An important question in asset management is how solvency requirements impact the investment strategies of institutional investors. In this paper, we derive the optimal asset allocation of an insurer that minimizes its capital requirement for market risk determined with the Solvency II standard formula, subject to a target return on own funds. Solvency II is the risk-based framework for setting capital requirements of European insurance companies, in force since 2016. The solvency capital requirement is set such that the insurer’s own funds can absorb losses over a 1-year horizon with a probability of at least 99.5%. Within this framework, we analyze the properties of an optimal asset allocation for a representative European life insurance company.

Suggested Citation

  • Roy Kouwenberg, 2018. "Strategic asset allocation for insurers under Solvency II," Journal of Asset Management, Palgrave Macmillan, vol. 19(7), pages 447-459, December.
    • Handle: RePEc:pal:assmgt:v:19:y:2018:i:7:d:10.1057_s41260-018-0097-4
    DOI: 10.1057/s41260-018-0097-4
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    References listed on IDEAS

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    1. David van Bragt & Hens Steehouwer & Bart Waalwijk, 2010. "Market Consistent ALM for Life Insurers—Steps toward Solvency II," The Geneva Papers on Risk and Insurance - Issues and Practice, Palgrave Macmillan;The Geneva Association, vol. 35(1), pages 92-109, January.
    2. Duarte, Thiago B. & Valladão, Davi M. & Veiga, Álvaro, 2017. "Asset liability management for open pension schemes using multistage stochastic programming under Solvency-II-based regulatory constraints," Insurance: Mathematics and Economics, Elsevier, vol. 77(C), pages 177-188.
    3. Alexander Braun & Hato Schmeiser & Florian Schreiber, 2017. "Portfolio Optimization Under Solvency II: Implicit Constraints Imposed by the Market Risk Standard Formula," Journal of Risk & Insurance, The American Risk and Insurance Association, vol. 84(1), pages 177-207, March.
    4. Alexander Braun & Hato Schmeiser & Florian Schreiber, 2015. "Solvency II's Market Risk Standard Formula: How Credible Is the Proclaimed Ruin Probability," Journal of Insurance Issues, Western Risk and Insurance Association, vol. 38(1), pages 1-30.
    5. Katharina Fischer & Sebastian Schlütter, 2015. "Optimal Investment Strategies for Insurance Companies when Capital Requirements are Imposed by a Standard Formula*," The Geneva Risk and Insurance Review, Palgrave Macmillan;International Association for the Study of Insurance Economics (The Geneva Association), vol. 40(1), pages 15-40, March.
    6. David van Bragt & Dirk-Jan Kort, 2011. "Liability-Driven Investing for Life Insurers," The Geneva Papers on Risk and Insurance - Issues and Practice, Palgrave Macmillan;The Geneva Association, vol. 36(1), pages 30-49, January.
    7. Alexander Braun & Hato Schmeiser & Florian Schreiber, 2018. "Return on Risk-Adjusted Capital Under Solvency II: Implications for the Asset Management of Insurance Companies," The Geneva Papers on Risk and Insurance - Issues and Practice, Palgrave Macmillan;The Geneva Association, vol. 43(3), pages 456-472, July.
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    Cited by:

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    2. Kerstin Dächert & Ria Grindel & Elisabeth Leoff & Jonas Mahnkopp & Florian Schirra & Jörg Wenzel, 2022. "Multicriteria asset allocation in practice," OR Spectrum: Quantitative Approaches in Management, Springer;Gesellschaft für Operations Research e.V., vol. 44(2), pages 349-373, June.

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