Solvency II : regulations impact on insurers’ investments

The funds collected by insurers must be placed in investments that comply with strict rules according to their:

• nature,
• distribution,
• average life span.

The recent entry into force of Solvency II requires new adjustment rules to equity capital designed for underwritten risks by insurance companies.

While insurers are often tempted by more considerable risks in order to increase their performance, Solvency II encourages reduction of general risk profile in order to improve Solvency Capital Requirement "SCR". A good asset-liability management "ALM" , such as the adaptation of duration gaps with the investment portfolio, is hence primordial.

Insurers are, therefore, torn between attractive returns and investments that consume less Solvency Capital Requirements. Asset-liability adequacy is all the more news that the current rate decrease will raise the value of future inflows to refund policyholders, which results in a liability increase. Insurers whose duration gap is too high find themselves penalized.

Moreover, Solvency 2 regulatory framework is not prone to passive investment strategies.

Asset management policy therefore becomes essential. It must take into account:

• The level of commitments taken, their duration and the remuneration of insurance policies,
• Liquidity needs,
• Protection of solvency and equity margins,
• Financial results, surplus emanating from gains of asset disposal and profit participations paid to life insurance policyholders,
• Hedging financial products limiting fluctuation of financial returns and the impact of market-related hazards.