Solvency II: New risk-based capital standards altering the capital requirements for the insurance industry within the EU - Potential effects on asset allocation within Swedish life insurance companies

Abstract: The objective of this thesis is to analyse the perceptions of how the incoming regulation, Solvency II, will affect Swedish life insurance companies regarding changes in asset allocation. The main hypothesis, divided into 4 sub-hypotheses, focuses on evaluation of the asset classes known as fixed income, public equity, other equities/alternative investments and real estate. To achieve the objective, we used a closed question survey; to confirm and secure the results, semi-structured interviews were performed involving both Swedish life insurance companies and prominent experts. In addition, we made a modeled simulation based on one of the companies in the study. We find that both insurance companies and experts expect the changes in the regulatory landscape to have an impact on the companies' investment strategies. According to our results, the impact on asset allocations will differ between large and small insurance companies. The perception is that the impact will be more extensive for the small insurers and that this group will have to de-risk their allocations to a larger extent. In general, the asset allocations will decrease or remain unchanged for public equity, other equities/alternative investments and real estate in favour of investments in more low-risk assets of fixed income. Finally, we found that Swedish life insurance companies are well prepared for the coming regulation of Solvency II as some adjustments of asset allocation have already occurred during the past few years, meaning the effect will not be too dramatic.