Portfolio optimisation in a Solvency II world

UBS considers the implications of Solvency II for portfolio optimisation, and particularly the diversification of risky assets away from high-equity concentrations

The proposed Solvency II Directive1 states the objective that an "economic risk-based approach should be adopted that provides incentives for insurance and reinsurance undertakings to properly measure and manage their risks".

In this article, UBS demonstrates that the QIS3 standard model actually discourages diversification into alternative asset classes and shows how a more balanced standard model should be paramaterised, and how to build more sophisticated approaches within an internal model.

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