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Determining a strategic asset allocation in a Solvency II framework

Outlooks & Research

BNP Paribas Asset Management

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.

Any views expressed here are those of the author as of the date of publication, are based on available information, and are subject to change without notice. Individual portfolio management teams may hold different views and may take different investment decisions for different clients. This document does not constitute investment advice.

The value of investments and the income they generate may go down as well as up and it is possible that investors will not recover their initial outlay. Past performance is no guarantee for future returns.

Investing in emerging markets, or specialised or restricted sectors is likely to be subject to a higher-than-average volatility due to a high degree of concentration, greater uncertainty because less information is available, there is less liquidity or due to greater sensitivity to changes in market conditions (social, political and economic conditions).

Some emerging markets offer less security than the majority of international developed markets. For this reason, services for portfolio transactions, liquidation and conservation on behalf of funds invested in emerging markets may carry greater risk.

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