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Advisor(s)
Abstract(s)
This study examines the trade-off between asset allocation and Solvency II requirements
in the context of a specific Portuguese life insurer. Under the Solvency II regime, life
insurers must maintain sufficient capital to cover risks, particularly market risk, which is
significantly impacted by asset allocation decisions. The challenge lies in balancing
profitability with the necessity to maintain a strong solvency position.
To address this, an optimization model was developed to derive optimized asset
allocation strategies that aim to maximize the insurer’s profitability while adequately
accounting for the Solvency Capital Requirement for the Market Risk sub-module (SCR
Market). The model also incorporates investment limits to ensure that the asset allocations
align with the life insurer’s investment strategy.
The results demonstrate that the life insurer’s profitability can be increased while
maintaining the same SCR Market value by reallocating toward more capital-efficient
asset classes, such as corporate bonds and property. However, despite their higher return
potential, equities were excluded from the optimized portfolio due to their significant
impact on the SCR Market. An efficient frontier analysis further illustrates the trade-off
between profitability and solvency, showing how asset allocation shifts to maximize
profitability as different solvency positions are targeted.
This work provides valuable insights for life insurers, demonstrating how
optimized asset allocation strategies focused on capital-efficient assets can improve
profitability while still maintaining strong solvency positions.
Description
Keywords
Asset Allocation Solvency II Market Risk Capital Efficiency
Pedagogical Context
Citation
Machado, Daniel Alexandre Da Silva (2024). “Trade-off between asset allocation and solvency II requirements: the case of a portuguese life insurer”. Dissertação de Mestrado. Universidade de Lisboa. Instituto Superior de Economia e Gestão.
Publisher
Instituto Superior de Economia e Gestão