In this article we focus on constructing "Solvency II efficient" credit portfolios. We discuss how to minimize the solvency capital requirement (SCR) under the standard model of Solvency II for a given target return.
The Solvency II capital charge has become an important aspect in portfolio construction and asset allocation for insurance companies, next to the traditional trade-off between risk and return. The methods developed in this article can be used to construct "Solvency II efficient" credit portfolios. We conclude that the overall SCR of an insurance company can be minimized by applying a barbell-like strategy. This approach uses high duration high-rated instruments to minimize the SCR and low duration low-rated instruments to reach the target return.
Authors: Christian Burger and David van Bragt
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This is the fourth issue of our Regulatory insights. In this series we will keep you updated on the impact of regulatory developments on investments and capital management.
Click here to read the first Regulatory insight: Major impact IFRS-9 on insurance companies.
Click here to read the second Regulatory insight: Impact of mortgage investments under Solvency II.
Click here to read the third Regulatory insight: Impact of government-related private loans under Solvency II.
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