IDEAS home Printed from https://ideas.repec.org/p/arz/wpaper/eres2014_84.html
   My bibliography  Save this paper

Effects of Solvency II on Asset Allocation

Author

Listed:
  • Michael Heinrich
  • Daniel Wurstbauer

Abstract

The current structural low-interest environment is encouraging institutional investors to rethink their asset allocation strategies and increase their exposure towards alternative asset classes, such as real estate and infrastructure. This is particularly the case for insurance companies, which come under pressure to reduce their investment in currently low-yielding government bonds, given the high interest rate guarantees associated with obligations from existing life insurance contracts. As a consequence, insurance companies may be forced to rearrange their assets appropriately. However, the forthcoming Solvency II Directive could counteract this scenario. After Solvency II comes into effect, insurance companies will be subject to higher capital requirements aimed at ensuring insurance-protection even in the case of macroeconomic shocks. The Solvency Capital Requirements (SCR) varies by asset class and is determined by the Solvency II standard formula, which also determines the methodology used to aggregate the respective required equity position. Therefore, it may become necessary for insurers to minimize the SCR by means of their asset allocation, depending on their capitalization, profitability and the general competitive dynamics. If the results of such an optimization are not in accordance with those of conventional optimal asset allocation, Solvency II will lead to inefficient capital allocation in practice. As a result, the portfolio risk would increase, which contradicts the original purpose of the regulation. Furthermore, changing investment behavior from insurers might also have direct effects on the pricing and the product range offered on the capital markets, e.g. for real estate investments.We therefore analyze, whether the Solvency II standard formula could indeed cause the abovementioned incentive incompatibility with respect to the asset allocation process. The main focus lies on the potential shift of direct real estate and direct infrastructure weights within the portfolios of insurers under the Solvency II regime.

Suggested Citation

  • Michael Heinrich & Daniel Wurstbauer, 2014. "Effects of Solvency II on Asset Allocation," ERES eres2014_84, European Real Estate Society (ERES).
  • Handle: RePEc:arz:wpaper:eres2014_84
    as

    Download full text from publisher

    File URL: https://eres.architexturez.net/doc/oai-eres-id-eres2014-84
    Download Restriction: no
    ---><---

    More about this item

    JEL classification:

    • R3 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Real Estate Markets, Spatial Production Analysis, and Firm Location

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:arz:wpaper:eres2014_84. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: . General contact details of provider: https://edirc.repec.org/data/eressea.html .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    We have no bibliographic references for this item. You can help adding them by using this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Architexturez Imprints (email available below). General contact details of provider: https://edirc.repec.org/data/eressea.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.