Investment Opportunities for Swedish Life Insurance Companies

Sammanfattning: Since the new risk sensitive regulation Solvency II was enabled the 1st of January 2016 the European insurance companies have to review their investment strategies. Insurance companies are among the largest institutional investors in Europe holding EUR 6.7 trillion assets, thus major changes in their asset management can impact the capital markets. To investigate how the investing opportunities have changed for life insurance companies, a representative Swedish life insurance company with an occupational pension portfolio was simulated for thirty years. This was made by first simulating the money market, bonds, equities and real estate for the simulated time by a stochastic multivariate process. Using Modern Portfolio Theory the portfolio weights was constructed for the financial asset portfolios for the model of the company. To determine future liabilities a representative ITP 2 pension portfolio was modelled where the pension policies was priced using traditional life insurance pricing theory in continuous time. For the company to be representative actuarial assumptions and as well as a consolidation policy was constructed in line with the major traditional life insurance companies in Sweden. The simulations of the company resulted in monthly cash flows, development of life insurance mathematical functions and the solvency capital requirements. The solvency capital requirement by Solvency II was calculated by applying the standard formula handed by EIOPA, where for life insurance companies the market risk module dominates in contribution to the capital requirement. By comparing the new risk sensitive capital requirement with the solvency capital requirement by the old regulations a change of structure dependent on time and asset allocation was observed. The Solvency II capital requirement for life insurance companies is clearly more dependent on the financial asset strategy for the company whereas the old capital requirement is not. The structure of the new capital requirement follows the same structure as the solvency market risk module where it is clear that low risk portfolios does not necessarily correspond to a lower capital requirement. The conclusion of this thesis is that life insurance companies in Sweden have tightened financial investing opportunities. This is due to Solvency II since this regulation is more risk sensitive than the old regulation.