Standard Life Investments

Published Article

Solvency Solutions


Insurance businesses around the world are watching with interest as Europe prepares for Solvency II. Bruce Porteous, Standard Life Investments’ resident expert, keeps us abreast of the latest developments

Absolute Return Funds


We are seeing growing interest from insurers in absolute return funds, driven by our understanding that these are capital efficient under Solvency 2.

Shareholder, with profit fund and general insurance assets are all potential candidates for investment in these funds.

With UK 10 year gilt yields lower than 2%, insurers are looking for ways to improve returns, without taking on too much risk.

Based on our own experience and internal analyses, it is possible to construct absolute return bond funds earning a benchmark return of LIBOR + 3% and with 50% of the Solvency 2 market risk capital charge of a comparable credit fund.

Given the above, it is perhaps not that surprising that interest is growing.


The appetite from Asia insurers to learn about European developments in the solvency and financial reporting arenas, and including the investment consequences, is voracious.

We will be hosting an insurance training event in June this year with firms from China, Japan, South Korea and Singapore represented.

Asian insurers are very keen to study European markets to help them anticipate and prepare for expected similar changes in their own markets.


Separately, we have had a number of very useful conversations with Japanese insurers as they are increasingly outsourcing assets beyond Japan.

Of particular interest is the way that these insurance outsourcing mandates operate in practice - for example the mechanics of how liability aware instructions are issued from the insurer to the asset manager and also the teams and operational processes that are needed to achieve this successfully.

As always, we are sharing our experiences and building relationships.

Frankfurt and London

Both EIOPA and PRA have issued communications advising that internal model insurance firms should hold capital against sovereign debt risks.

For this purpose, sovereign debt covers exposures to bonds and loans issued or guaranteed by central banks, central governments and supranational organisations.

There is still no change, however, in the Standard Solvency Capital Requirement which applies to insurers not using their own internal models and this may cause level playing field issues.

For example, capital requirements for internal model insurers holding Greek sovereign debt could be materially higher than for Standard firms.

It will be interesting to see if there are any implications for sovereign debt markets and we may perhaps see yields in the “safe haven” markets falling even further relative to markets that are perceived to be riskier.

UK Annuities

The PRA has now given its Matching Adjustment firm pre-application feedback to annuity firms in the UK and has also published generic feedback on its website.

This feedback is of critical importance to UK annuity firms as it will drive their annuity book asset strategies and, ultimately, will also have a great say on the solvency position of the firm.

Particular issues that will be exercising firms’ management include the requirement to manage annuity book collateral separately from non annuity book collateral. This creates new operational challenges, as does the PRA’s decision that rolling FX forwards cannot be used to hedge currency risk.

Constructing optimal asset portfolios, and sourcing the right assets to maximise the Matching Adjustment, is becoming ever more important and pressing, with insurers’ Matching Adjustment applications due to be submitted before the end of June.

CIO Function Outsourcing

We caught up for lunch recently with an ex-colleague who leads the actuarial team of a small insurer that has decided to outsource its asset management.

Interestingly, and as a consequence of the many additional demands that Solvency 2 is putting on smaller firms especially, firms are increasingly looking to outsource the CIO Function, as well as asset management.

The details have still to be fleshed out, however the insurer will be looking to the outsourced asset manager to dynamically manage liability aware mandates within prescribed parameters that allow the asset manager substantial discretion.


We recently met up with a firm of insurance consultants who are advising insurers in the Italian market place.

We had a very interesting conversation - as we had expected, Italian insurers are looking for Solvency 2 efficient asset solutions and provided by asset managers who have the capability to provide accurate and fast line-by-line Solvency 2 compliant asset reporting.

There was a feeling that real-time Solvency 2 risk reporting is also a capability that many insurers will soon be expecting from their asset managers!

Bruce Porteous

First published in Modern Investor (Citywire) 1 July 2015