« Insurers’ equity investments have become less problematic »
In the light of the 5th quantitative impact study (QIS 5), do insurance companies need to reduce their equity holdings?
In the QIS 5, the European Commission fixed the equity shock at 39 % for EEA (European Economic Area) and OECD* listed equities and at 49 % for equities listed elsewhere and unlisted equities. With the market symmetric adjustment mechanism ("dampener"), now based on a three year period, the capital requirement as of 31 December 2009 have in the end been reduced to 30 % and 40 % respectively. For pension liabilities such as PERP** schemes, the equity stress has been reduced to 22 %. Solvency II also takes into account hedging techniques used to reduce the net exposure. In the end, insurers’ equity investments are less problematic. Moreover, the reduction of their net exposure, currently around 5 %, is above all linked to the 2008 financial crisis.
Are government bonds favoured to the detriment of other assets?
Government bonds remain the least risky assets on the markets. They are only subject to an interest rate shock, unlike corporate and covered bonds which are also subject to spread and concentration risks and, accordingly, have higher regulatory capital requirements. Non-life and life insurers use them widely (corporate and covered bonds, editor’s note) to cover their long-term liabilities.
In the end, will the solvency capital requirement (SCR) guide the asset allocation of insurers?
The SCR will be one parameter among others. Investment decisions will continue to be guided in addition by requirements relating to asset-liability management and financial market opportunities. Solvency II will neither result in a complete re-examination of the allocation strategy of insurers nor exclude one type of asset in particular from the scope of possible investments. In this regard, the recognised advantages of diversification play a very important role.
*Organisation for Economic Cooperation and Development
**Individual Retirement Savings Plan