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Effects of Solvency II on Portfolio Efficiency, The Case of Real Estate and Infrastructure Investments

Michael Heinrich and Thomas Schreck ()

LARES from Latin American Real Estate Society (LARES)

Abstract: We examine the potential effects of Solvency II on general portfolio efficiency, and specifically on the allocation of alternative assets by European insurers. The paper starts with a brief intro- duction to the Solvency II Directive, focusing on the rules for calculating the Solvency capital requirements (SCR), according to the standard formula. The following empirical analysis en- tails several portfolio optimizations considering six relevant asset classes for the time period from 1993-2013. We derive optimal portfolios with respect to portfolio risk and capital require- ments, and finally combine both optimization problems. Our results suggest that, although the capital charges for real estate and infrastructure assets are not adequately calibrated, a signifi- cant shift of portfolio weights is not expected for the majority of European insurers. However, after Solvency II comes into effect, undercapitalized insurers may often not be capable of hold- ing risk-optimal allocations of alternative assets.

Keywords: Financial Crisis; Infrastructure; Life Insurance; real estate; Risk Based Regulation (search for similar items in EconPapers)
JEL-codes: R3 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-ias and nep-rmg
Date: 2017-09-01
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