Lightening the capital burden of equities
In a low-yield world the potential long-term returns from holding equities remain attractive. However, there is heightened volatility and the risk of sharp corrections to contend with, and the capital one must allocate to support an equity investment under Solvency II is often viewed as penal.
We believe that many insurers would invest in equities if they were able to protect against excessive downside risk and lighten the capital burden.
In this article we present two solutions to these issues, Smart Collars and Smart Volatility-Control.
These techniques allow investors to take an exposure to equities in a capital-efficient, risk-efficient and cost-efficient manner. They are being used by insurers investing for their general account, to reduce both P&L and SCR volatility, and by insurers looking for lower-volatility ‘growth asset’ savings products for distribution to more cautious end investors.