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Insurers can capitalise on investments to meet Solvency II requirements

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The prudential framework of Solvency II might give a boost to the cultural revolution underway in the managerial practices in insurance companies: integration of risks and consideration of the cost of capital and value creation, rather than mere analysis of profit margins.

These are the findings of a study published by Edhec and sponsored by Swiss Re, entitled Solvency II: An Internal Opportunity to Manage the Performance of Insurance Companies.

The study shows how, by perfecting their existing management tools, insurers can capitalise on the investments made to meet Solvency II regulatory requirements.

By modelling and simulating the Solvency II regulatory constraints on an insurance company active in six lines of business, the study highlights the contributions made by an economic capital model to the management of the company, in particular to the definition of policies for asset allocation, management of shareholder’s equity, asset/liability management, hedging of risks, launch of new products, and valuation.

Philippe Foulquier, author of the study and director of the Edhec Financial Analysis and Accounting Research Centre, says: “Making the cost of capital part of the measure of performance is likely to impose a certain management discipline on both executive and operational managers, as capital does not come without a cost.”

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