Top

Zeitschrift für die gesamte Versicherungswissenschaft

Published in:

20-07-2018 | Abhandlung

The impact of risk-based regulation on European insurers’ investment strategy

Authors: Michael Heinrich, Daniel Wurstbauer

Published in: Zeitschrift für die gesamte Versicherungswissenschaft | Issue 3/2018

Activate our intelligent search to find suitable subject content or patents.

search-config

AI-assisted search

Off

Abstract

This paper examines the impact of Solvency II on the attainability of target returns, the attainability of portfolio efficiency and the asset allocation of European insurers. I start with a brief introduction to the Solvency II Directive, focusing on the rules for calculating solvency capital requirements (SCR) according to the Solvency II standard formula. The subsequent numerical analysis includes several portfolio optimizations focusing on six relevant asset classes for the 1993–2017 time period. I derive optimal portfolios with respect to the Solvency II capital requirements, with respect to conventional risk measures, and I combine both optimization problems. My results show that the capital requirements according to Solvency II are not adequately calibrated. Nevertheless, due to a solid equity base, the majority of European insurers are still able to attain high target returns and mean-variance-efficiency. However, undercapitalized insurers are not able to hold risk-optimal allocations of equities, real estate and hedge funds any longer. In an environment of very low interest rates, these insurers may also face difficulties obtaining their target returns. To the best of my knowledge, this is the first paper to explicitly incorporate the solvency capital requirement as a numerical constraint into the insurers’ portfolio optimization problem. As a result, my approach first provides insights about the attainable target return and the asset weights as a direct function of insurers’ equity.

next article Aktienanlage für Lebensversicherer unter Solvency II

Dont have a licence yet? Then find out more about our products and how to get one now:

Springer Professional "Wirtschaft"

Online-Abonnement

Mit Springer Professional "Wirtschaft" erhalten Sie Zugriff auf:

über 67.000 Bücher
über 340 Zeitschriften

aus folgenden Fachgebieten:

Bauwesen + Immobilien
Business IT + Informatik
Finance + Banking
Management + Führung
Marketing + Vertrieb
Versicherung + Risiko

Jetzt Wissensvorsprung sichern!

inform now

Springer Professional "Wirtschaft+Technik"

Online-Abonnement

Mit Springer Professional "Wirtschaft+Technik" erhalten Sie Zugriff auf:

über 102.000 Bücher
über 537 Zeitschriften

aus folgenden Fachgebieten:

Automobil + Motoren
Bauwesen + Immobilien
Business IT + Informatik
Elektrotechnik + Elektronik
Energie + Nachhaltigkeit
Finance + Banking
Management + Führung
Marketing + Vertrieb
Maschinenbau + Werkstoffe
Versicherung + Risiko

Jetzt Wissensvorsprung sichern!

inform now

Available only for authorised users

See ECB (2017).

According to an analysis by Assekurata (2016), for example, the average guaranteed interest rate on existing policies among German life insurance companies amounted to 2.97% in 2016.

Blackrock (2013), Preqin (2013), Preqin (2015), Insurance Europe and Oliver Wyman (2013), Towers Watson (2013), EY (2016), EY (2017).

Besides the effects on portfolio efficiency, a reallocation of insurers’ assets could lead to fundamental shifts in demand and pricing for several asset classes, as Fitch Ratings (2011) has already pointed out.

See, for example, Braun et al. (2014), Gatzert and Kosub (2013), Gatzert and Martin (2012), Severinson and Yermo (2012), Fischer and Schlüter (2012), Rudschuck et al. (2010) and Van Bragt et al. (2010).

Note that the attainability of a certain target return is necessary to fulfill the interest rate guarantees on existing life insurance policies, as already pointed out.

The European Insurance and Occupational Pensions Authority (EIOPA) is part of a European System of Financial Supervisors that comprises three European Supervisory Authorities.

All data is obtained from Thomson Reuters Datastream.

The BofA Merrill Lynch (Code: MLEX-PEE) European corporate bond index only dates back to 1996. The index shows a very similar risk-return profile and correlation patterns. Therefore, my results are unlikely to be affected by the choice of this index.

In accordance with the EIOPA framework, the value at risk was calculated on an annual basis for the 99.5% level.

The Solvency II covariance matrix is calculated as the outer product of the regulatory correlation matrix (\(R_{\mathrm{reg}})\) and the column vector of capital requirements (\(\boldsymbol{SCR})\), both as shown in Table 1 (\(\Sigma_{\mathbf{reg}}=\boldsymbol{SCR}\otimes R_{\mathrm{reg}}\otimes \boldsymbol{SCR'}).\) The resulting matrix is not positive semi-definite, which may cause a discontinuity in the quadratic objective function (Eq. 11). I therefore apply the algorithm of Higham (2002) in order to obtain the nearest positive semi-definite matrix. Furthermore, there are circularity issues: Both the equity SCR and the interest rate SCR are a function of the portfolio weights themselves (i. e., a function of the solution vector of the optimization program). While the equity SCR accounts for diversification within the equity sub-module, the interest rate SCR is determined by the duration gap, which in turn depends on the weights of corporate bonds and government bonds. To overcome these issues, all N permissible combinations of hedge funds, stocks, corporate bonds and government bonds are enumerated up to the fourth decimal place. For any given target return, the original problem is now solved N times. Each of the N optimizations uses the corresponding preset asset weights as additional constraints (i. e., the weights of the four asset classes with circularity issues are held constant). Hence, the covariance matrix no longer exhibits circular references. Finally, the portfolio allocation with the lowest SCR of all the N optimization results is chosen as the global optimum for the respective target return.

The investment limits I use are particularly inspired by the German “Regulation on the Investment of Restricted Assets of Insurance Undertakings” (Investment Regulation; German: Anlageverordnung).

The lowest portfolio target return is determined by the asset class with the lowest expected return, i. e., money market. At the other extreme, the highest portfolio target return is achieved by sequentially increasing the weights of the assets with higher expected returns, until the individual investment limits are reached.

This corresponds to a value at risk of approximately 95%, assuming returns are normally, identically and independently distributed.

Assekurata: Marktausblick zur Lebensverischerung 2016/2017. Research Report. (2016)

Barkham, R., Geltner, D.: Unsmoothing British valuation-based returns without assuming an efficient market. J. Prop. Res. 11(2), 81–95 (1994)CrossRef

Blackrock: Global insurance: investment strategy at an inflection point? Research Report. (2013)

Braun, A., Schmeiser, H., Siegel, C.: The impact of private equity on a life insurer’s capital charges under solvency II and the Swiss solvency test. J. Risk Insur. 81(1), 113–158 (2014)CrossRef

Braun, A., Schmeiser, H., Schreiber, F.: Portfolio optimization under solvency II: implicit constraints imposed by the market risk standard formula. J. Risk Insur. 84(1), 177–207 (2015)CrossRef

Collet, D., Lizieri, C., Ward, D.: Timing and the holding periods of institutional real estate. Real Estate Econ. 31(2), 205–222 (2003)CrossRef

Committee of European Insurance and Occupational Pension Supervisors (CEIOPS): CEIOP’s report on its fourth quantitative impact study (QIS4) for solvency II. CEIOPS-SEC-82/08. (2008)

European Central Bank: Statistics on euro area insurance corporations. Research Report. (2017)

European Insurance and Occupational Pensions Authority (EIOPA): Report on the fifth quantitative impact study (QIS5) for solvency II. EIOPA-TFQIS5-11/001. (2011)

European Insurance and Occupational Pensions Authority (EIOPA): Revised technical specifications for the solvency II valuation and solvency capital requirements calculations (part I). EIOPA-DOC-12/467. (2012)

EY: Trendbarometer Immobilienanlagen der Assekuranz 2016. Research Report. (2016)

EY: Trendbarometer Immobilienanlagen der Assekuranz 2017. Research Report. (2017)

Fischer, K., Schlüter, S.: Optimal investment strategies for insurance companies in the presence of standardised capital requirements. ICIR Working Paper Series No. 09/12. (2012)

Fitch Ratings: Solvency II set to reshape asset allocation and capital markets. Insurance Rating Group Special Report. (2011)

Gatzert, N., Kosub, T.: Insurer’s investment in infrastructure: overview and treatment under solvency II. Geneva Pap. Risk Insur. Issues Pract. 39(2), 351–372 (2013)CrossRef

Gatzert, N., Martin, M.: Quantifying credit and market risk under solvency II: standard approach versus internal model. Insur. Math. Econ. 51(3), 649–666 (2012)CrossRef

Higham, N.: Computing the nearest correlation matrix – a problem from finance. J. Numer. Anal 22(3), 329–343 (2002)CrossRef

Hoering, D.: Will solvency II market risk requirements bite? The impact of solvency II on insurer’s asset allocation. Geneva Pap. Risk Insur. Issues Pract. 38(2), 250–273 (2013)CrossRef

Insurance Europe and Oliver Wyman: Funding the future-insurer’s role as institutional investors. Research Report. (2013)

Marcato, G., Key, T.: Direct investment in real estate – momentum profits and their robustness to trading costs. J. Portf Manag. 31(5), 55–69 (2005)CrossRef

Markowitz, H.M.: “portfolio selection”. J. Finance. 7(1), 77–91 (1952)

Preqin: Insurance companies investing in infrastructure. Research Report. (2013)

Preqin: Insurance companies investing in alternative assets. Research Report. (2015)

Rehring, C.: Real estate in a mixed-asset portfolio: the role of the investment horizon. Real Estate Econ. 40(1), 65–95 (2012)CrossRef

Rudschuck, N., Basse, T., Kapeller, A., Windels, T.: Solvency II and the investment policy of life insurers: some homework for sales and marketing departments. Interdiscip. Stud. J. 1(1), 57–70 (2010)

Severinson, C., Yermo, J.: The effect of solvency regulations and accounting standards on long-term investing: implications for insurers and pension funds. OECD working paper on finance, insurance and private pensions, no. 30. OECD Publishing, Paris (2012)

Towers Watson: Global alternatives survey 2013. Research report. (2013)

Van Bragt, D., Steehouwer, H., Waalwijk, B.: Market consistent ALM for insurers – steps toward solvency II. Geneva Pap. Risk Insur. Issues Pract. 35(1), 92–109 (2010)CrossRef

Title: The impact of risk-based regulation on European insurers’ investment strategy
Authors: Michael Heinrich
Daniel Wurstbauer
Publication date: 20-07-2018
Publisher: Springer Berlin Heidelberg
Published in: Zeitschrift für die gesamte Versicherungswissenschaft / Issue 3/2018
Print ISSN: 0044-2585
Electronic ISSN: 1865-9748
DOI: https://doi.org/10.1007/s12297-018-0403-8

Springer Professional

Abstract

Please log in to get access to your license.

Dont have a licence yet? Then find out more about our products and how to get one now:

Springer Professional "Wirtschaft"

Springer Professional "Wirtschaft+Technik"

Other articles of this Issue 3/2018

Aktienanlage für Lebensversicherer unter Solvency II

Digital insurance brokers—old wine in new bottles? How digital brokers create value

Portfolio structure of the German households and the role of insurance and pension entitlements

Ronny Rudi Richter: Strafvereitelung wegen Nichtanzeige von Straftaten nach Prüfungen durch die Stellen zur Bekämpfung von Fehlverhalten im Gesundheitswesen

Neuerscheinungen versicherungswissenschaftlicher Bücher – Ausführliche Hinweise