The EU’s Solvency II directive implemented in 2016 was a paradigm change for European insurers, presenting them with the difficult challenge of reconciling different objectives linked to stakeholders, regulation and time horizon.
It meant that asset allocation choices should take into account the trade-off between economic risk and accounting risk, as insurers needed to reconcile the principles introduced by Solvency II with local accounting rules.
Combining three layers of asset allocation can contribute to overcoming the time horizon challenge. On the one hand, a long-term approach when determining the strategic allocation of an insurer’s existing assets can help ensure consistency with the long-term nature of the insurance business. And then opportunities linked to entry points can be seized through a medium-term strategic asset allocation combined with the long-term one. Risk management also helps in protecting free capital in the short term.
In our research paper, ‘Determining a strategic asset allocation in a Solvency II framework’, we explain why it is crucial to have a solid, flexible framework capable of adapting to Solvency II parameters and to insurers’ specific situations, and what factors to take into account when forming that framework.
