Life Insurance Companies’ Optimal Asset Allocation under Solvency II: With Focus on Infrastructure

Julie Gøth-Johansen & Trine Dean Munkholm

Student thesis: Master thesis


This paper seeks to investigate the Danish life insurance companies’ level of investment in infrastructure. Initially, the structure of the life insurance market is analyzed where primarily two products are offered: the participating life insurance and the lifecycle insurance policy. The participating life insurance includes a guarantee to the policyholder contrary to the lifecycle insurance policy that do not offer a guarantee and therefore has a larger investment freedom.
Life insurance companies must comply with the Solvency II regulation which seeks to ensure the compa-nies’ ability to meet their liabilities and thereby protect the policyholder. The regulation specifies that the life insurance companies must govern their investment strategy to meet an acceptable Solvency Capital Requirement (SCR). As this thesis focuses on the asset allocation in regards of infrastructure the focus is on the sub-module market risk. Based on the conducted analyses, the intrusiveness of Solvency II differs between the product types due to the nature of the products. The participating life insurance is directly limited in the investment strategy with respect to SCR while only liquidity restrictions are imposed on the lifecycle insurance policy. Further the conducted analyses of infrastructure as an investment concludes that the asset has an attractive risk-return relation where the long investment horizon and the stable cash-flow represents a good match for the company’s long-term insurance obligation to the policyholder.
Based on data from JP Morgan efficient portfolios are created for both the participating life insurance and lifecycle insurance policy through optimization. The first optimization concludes a larger allocation to infrastructure than the observable amount in benchmark companies. The limits of Solvency II are intro-duced in the second optimization, implying a decreased amount of investment in infrastructure for both product types though still a larger allocation than the observable amount. This paper can therefore con-clude that the amount invested in infrastructure is rather restricted based on the imposed restrictions of Solvency II compared to the optimal amount allocated when not taking regulation into perspective.

EducationsMSc in Finance and Accounting, (Graduate Programme) Final Thesis
Publication date2020
Number of pages108