Written on 14 June 2012.
The new benchmarks for European insurance companies are representative of a dynamic allocation strategy to equities.
The benchmarks, which are based on two underlying indices from Russell Indexes, Russell Developed and Russell Global, rely on dynamic core-satellite and life-cycle investing techniques and allow investors to respect a maximum loss limit in each calendar year.
The benchmarks’ current and historical performance, with both returns and weights, along with a full set of documentation, are freely available for download online at the following address:
Faced with the prohibitive capital requirements associated with equity investments in the standard Solvency II formula, the EDHEC-Risk Solvency II Benchmarks can be used to achieve substantial exposure to equity risk and the associated premium, while maintaining strict and explicit control over the implied Solvency II charge. Easily replicable and straightforward to implement, the benchmarks are highly useful for insurance companies who wish to manage the reality of their risk exposures properly as stipulated by Pillar II. They also allow insurers to optimise capital investment related to equity risk under Pillar I. The capital freed up from this optimisation would be reallocated to cover other risks.
Professor Noël Amenc, Director of EDHEC-Risk Institute, said, “The EDHEC-Risk Institute Solvency II benchmarks enable European insurance companies which do not have a full internal model to avail of an objective academic reference that can serve as a starting point for a partial internal model. We expect that this original approach will facilitate dialogue with both regulators and auditors for the validation of risk management practices that allow for divergence from the standard formula and reintroduce equity as an affordable asset class for investment.”
Pascal Duval, CEO, EMEA, Russell Investments, said, “The implications and necessary preparations for organisations impacted by Solvency II are quite a minefield of regulations and complex financial analysis. Russell partnered with EDHEC-Risk because we wanted to help address insurers’ long-term needs for equity exposure in a framework that respects Solvency II and the need for very short-term risk control.
“These new Solvency II benchmarks will help insurers meet those objectives and, with the right expertise in an asset manager, offer insurers’ a rules-based framework in which they can also access the economic and risk benefits that diversification and active management have to offer.”