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22.7.2015

Solvency II - Asset allocation under Solvency II

Each asset class has a specific Market SCR which is calculated by aggregating several components based on different market risk factors (interest rates, spread, equities, forex). The highest Market SCRs are to found among commodities and naturally equities; rules do however make a distinction between stocks listed in EEC or OECD countries (type 1) where the target shock is 39% + dampener and other type 2 equities where the shock is 49% + dampener. For a €100 investment in emerging stocks, the regulatory capital would be 49 (excluding the loss-absorbing effect of liabilities and deferred taxes), which will not encourage higher allocations within this segment – unless the outlook for returns is particularly attractive. High-yield bonds, sought after by institutional investors in search of yield, are also rather penalised. Conversely, the lowest stress is applied to sovereign rates - the SCR for interest rate risk is calculated by applying a 42% shock on 10-year maturity bonds, with a minimum of 1%...

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