Summary
Over the course of recent weeks we have touched upon several peculiarities of the Solvency 2 regulation. One topic we haven’t talked about so far is equities. In the asset allocation of most countries, equities barely play a role.
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Dr Florian Ueltzhöfer
Actuary DAV/IVS
Teoman Kaplan
Actuary DAV
Over the course of recent weeks we have touched upon several peculiarities of the Solvency 2 regulation. One topic we haven’t talked about so far is equities. In the asset allocation of most countries, equities barely play a role.
We have seen “losers” and “winners”. Two countries, however, have shown fairly stable Solvency Ratios, if you remember our first instalment. In our second instalment, nonetheless, we have seen that Own Funds and SCR volatility has been quite apparent in these two countries: let’s talk about Sweden and Finland.
Traditionally, these markets have had the opportunity to invest in equities to a greater extent. As you can see on the left-hand side of today’s graph, the average equity exposure of Swedish insurers exceeds 40%. This explains the high volatility in EOF mentioned above.
The previously discussed measures, the VA and the TTP (Transitional Measure for Technical Provisions), do not play a major role in these countries. Instead, another one of the permanent and non-optional LTG measures – the Symmetric Adjustment (SA) – is a crucial driver. In Solvency 2, equity investments come with a substantial SCR charge of up to 49%. To prevent procyclical behaviour, however, an additional SCR charge is imposed in bull markets, and a reduction is applied in bear markets.
As we see on the right-hand side of our diagram, the SA was almost zero at the end of 2019. Theoretically, a reduction of 18% mid-March 2020, and of 13.1% at the end of Q1/2020, would have been applied. Due to a restriction to 10% under the current regulation, an actual SA of -10% has been applied, explaining the significant reduction in SCR for Sweden and Finland that we have observed in our second instalment.
Again, the circumstances described herein are going to be adjusted with the upcoming review of Solvency 2. For now, we conclude our discussions on the EIOPA data, and wish you a Merry Christmas and a Happy New Year.
LOOKING FORWARD TO FUTURE DISCUSSIONS ON THIS CHANNEL IN 2022, WHEN WE COMMENCE A NEW SERIES!
Asset Allocation of Swedish Life and Other Insurers, and level of (unrestricted) Symmetric Adjustment
Source: EIOPA, Insurance Statistics 2020 (SQ Exposures) and Monthly technical information Dec 2020, own presentation.
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