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Effects of Solvency II on Portfolio Efficiency, The Case of Real Estate and Infrastructure Investments

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  • Michael Heinrich
  • Thomas Schreck

Abstract

We examine the potential effects of Solvency II on general portfolio efficiency, and specifically on the allocation of alternative assets by European insurers. The paper starts with a brief intro- duction to the Solvency II Directive, focusing on the rules for calculating the Solvency capital requirements (SCR), according to the standard formula. The following empirical analysis en- tails several portfolio optimizations considering six relevant asset classes for the time period from 1993-2013. We derive optimal portfolios with respect to portfolio risk and capital require- ments, and finally combine both optimization problems. Our results suggest that, although the capital charges for real estate and infrastructure assets are not adequately calibrated, a signifi- cant shift of portfolio weights is not expected for the majority of European insurers. However, after Solvency II comes into effect, undercapitalized insurers may often not be capable of hold- ing risk-optimal allocations of alternative assets.

Suggested Citation

  • Michael Heinrich & Thomas Schreck, 2017. "Effects of Solvency II on Portfolio Efficiency, The Case of Real Estate and Infrastructure Investments," LARES lares_2017_paper_8, Latin American Real Estate Society (LARES).
    • Handle: RePEc:lre:wpaper:lares_2017_paper_8
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    More about this item

    Keywords

    Financial Crisis; Infrastructure; Life Insurance; real estate; Risk Based Regulation;
    All these keywords.

    JEL classification:

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

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