The purpose of the Russell Investments "Solvency II Benchmarks" research chair is to design new benchmarks for European insurance companies that are representative of a dynamic allocation strategy to equities. The aim of the initiative is to enable all small- or medium-sized European insurance companies which do not have a full internal risk mitigation model to be able to avail of an objective academic reference in order to manage the risk of their equity investments. The benchmarks, based on dynamic core-satellite and life-cycle investing techniques, will allow investors to respect a maximum drawdown or maximum loss limit for specific horizons.

The chair will be overseen by a joint Russell Investments/EDHEC-Risk Institute steering committee.

[Press release announcing the launch of the research chair: 20/04/11]

Research output:

At separate seminars in Paris and London on December 13 and 14, 2011, entitled “Solvency II Benchmarks: How to Implement an Optimal Equity Allocation within Solvency II,” EDHEC-Risk Institute presented the results of research carried out with the support of Russell Investments that has led to the development of risk management strategies that allow European insurance companies to keep a reasonable capital requirement while providing attractive products to policyholders.

Putting in place these dynamic risk management strategies implies implementing partial internal models which capture insurance companies’ specific characteristics and in particular the benefits of these allocation strategies. Those benefits are several: responsiveness to changes in market environment, better exposure to the returns of the equity markets, and respect of Solvency II constraints.

The benchmarks’ framework is public, totally transparent, well documented and grounded in a rules-based approach with solid, objective academic foundations. These features turn the benchmarks into an independent external reference that can be used as the bare bones for the development of partial internal models by insurance companies.

[Press release announcing the “Solvency II Benchmarks”: 15/12/11]

Related research:

The Impact of IFRS and Solvency II on Asset-Liability Management and Asset Management in Insurance Companies
November 2006
Noël Amenc, Philippe Foulquier, Lionel Martellini, Samuel Sender
A study revealing the contradictions inherent in the current Solvency II and IFRS provisions for insurance companies. The report shows notably that the numerous provisions proposed by the IFRS are at odds with the good risk management practices put forward by Solvency II.

QIS2: Modelling that is at odds with the Prudential Objectives of Solvency II
November 2006
Philippe Foulquier, Samuel Sender
A paper in which EDHEC-Risk Institute focuses on certain aspects of the modelling suggested by CEIOPS in the QIS 2, demonstrating that the choice of certain concepts, measures and calibrations were sometimes hazardous and in contradiction with the goals of the evolution in the solvency framework.

CP 20: Significant Improvements in the Solvency II Framework but Grave Incoherencies Remain
January 2007
Philippe Foulquier, Samuel Sender
This paper contains EDHEC-Risk Institute's response to CP20, a consultation process initiated by CEIOPS (Committee of European Insurance and Occupational Pensions Supervisors) on the "Advice to the European Commission in the Framework of the Solvency II Project on Pillar I Issues".

QIS3: Meaningful Progress towards the Implementation of Solvency II, but Ground Remains to be Covered
June 2007
Samuel Sender, Philippe Foulquier
This document outlines EDHEC-Risk Institute's position on the third quantitative impact survey on the standard formula for the calculation of capital requirements for insurance companies under Solvency II.

QIS4: Significant Improvements, but the Main Risk for Life Insurance is not Taken into Account in the Standard Formula
February 2008
Samuel Sender
In its response to the CEIOPS consultation on the preliminary technical specifications for the fourth quantitative impact survey (QIS4), EDHEC-Risk Institute argues that the main risk faced by life insurance companies is not taken into account in the standard formula. This paper argues that such a combined risk can be taken into account only in a scenario in which high levels of surrenders are combined with market losses, and that market losses alone merely added to surrenders alone may not suggest any need for shareholder capital.

Solvency II: An Internal Opportunity to Manage the Performance of Insurance Companies
July 2009
Philippe Foulquier
This study shows that it may be in the interest of a company to capitalise on the investments required for purely regulatory ends to pursue its own objectives, in particular to perfect or create an economic dashboard, which can be used to improve management of the company. The leading European insurers, forerunners in this domain, show that their economic capital models make it possible to guide their choices, for the company as a whole or for individual lines of business.

Related events:

Presentation: Solvency II Benchmarks - How to Implement an Optimal Equity Allocation within Solvency II
December 13, 2011 - Paris / December 14, 2011 - London

EDHEC-Risk Institute, with the support of Russell Investments within the “Solvency II Benchmarks” research chair, has been designing new benchmarks for European insurance companies that are representative of a dynamic allocation strategy to equities.

The aim of the initiative is to enable all small- or medium-sized European insurance companies which do not have a full internal risk mitigation model to be able to avail of an objective academic reference in order to manage the risk of their equity investments. The benchmarks, based on risk-controlled investing and life-cycle investing techniques, will allow investors to respect a maximum drawdown or maximum loss limit for specific horizons.

This solution will appeal to insurers who are concerned either to reduce their tier 1 capital charge for equity as part of pillar 1, or to improve risk management within the framework of pillar 2, so that capital consumption will ultimately correspond to the reality of the company’s risks, beyond the planned regulatory risk levels.

At special presentations to be held in Paris on December 13, 2011 and in London on December 14, 2011, Professor Lionel Martellini, Scientific Director at EDHEC-Risk Institute, will be providing details on the solution developed by the EDHEC-Risk researchers, and Pascal Duval, CEO EMEA, Russell Investments will be explaining how the benchmarks can be implemented in practice.

For further information about the events, please contact severine.anjubault@edhec-risk.com.

About Russell Investments

Russell Investments is an independent, global financial services firm that provides strategic advice, investment solutions, implementation services and global performance benchmarks that are customized to meet the unique needs of institutional investors, financial advisors and individuals. Celebrating its 75th anniversary in 2011, Russell has pioneered innovations that have come to define many of the practices that are standard in the investment world today, and has four decades of experience researching and selecting money managers globally. Russell has about $161 billion in assets under management (as of 3/31/11) and works with 2,300 institutional clients, 530 independent distribution partners and millions of individual investors globally. As a consultant to some of the largest pools of capital in the world, Russell has $2 trillion in assets under advisement (as of 12/31/2010) and traded $1.5 trillion last year through its implementation services business. The Russell Global Indexes calculate over 50,000 benchmarks daily covering 63 countries and more than 10,000 securities. Founded in 1936, Russell is headquartered in Seattle, Washington, USA and has offices in Amsterdam, Auckland, Chicago, London, Melbourne, Milan, New York, Paris, San Francisco, Seoul, Singapore, Sydney, Tokyo and Toronto.

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