australiaen
Solvency regulations and low-risk investing: comparing the Nordics with the Netherlands

Solvency regulations and low-risk investing: comparing the Nordics with the Netherlands

11-02-2020 | Insight

Pension regulations in the Nordic countries and the Netherlands are similar to insurance regulation in the European Union. Solvency capital (SC) required for credit risk in corporate bond portfolios is close to its economic risk, while solvency capital for equity risk does not distinguish at all between low-risk and high-risk equity portfolios.

  • Laurens Swinkels
    Laurens
    Swinkels
    Researcher
  • Patrick  Houweling
    Patrick
    Houweling
    Head of Quant Credits

Speed read

  • SC required for credit risk is close to its economic risk
  • SC required for equity risk does not distinguish between low and high risk
  • This may contribute to the existence of the low-risk anomaly in equities

This shortcoming in the regulation encourages risk-seeking behavior by pension funds and insurance companies in their equity portfolios, and may contribute to the existence of the low-risk anomaly documented in the equity literature. Solvency regulation does not seem to discourage allocating to low-risk corporate bonds. However, other market frictions may cause the anomaly to persist in corporate bond markets.

In this paper1, we start by describing the regulatory frameworks in the Nordic countries and the Netherlands. We then continue with a more in-depth discussion of the possible reasons why low-risk investment strategies have a higher return-to-risk ratio, and apply this specifically to corporate bonds and equities from the perspective of insurance companies and pension funds.

1Houweling, P. and Swinkels, L., 2020, ‘Pension and Insurance Solvency Regulations and Low-Risk Investing: A Comparative Analysis of the Nordic Countries and the Netherlands’, Nordic Journal of Business.

Now also follow us on Instagram
Now also follow us on Instagram
Follow

Leave your details and download the research paper

Logo

Disclaimer

BY CLICKING ON “I AGREE”, I DECLARE I AM A WHOLESALE CLIENT AS DEFINED IN THE CORPORATIONS ACT 2001.

What is a Wholesale Client?
A person or entity is a “wholesale client” if they satisfy the requirements of section 761G of the Corporations Act.
This commonly includes a person or entity:

  • who holds an Australian Financial Services License
  • who has or controls at least $10 million (and may include funds held by an associate or under a trust that the person manages)
  • that is a body regulated by APRA other than a trustee of:
    (i) a superannuation fund;
    (ii) an approved deposit fund;
    (iii) a pooled superannuation trust; or
    (iv) a public sector superannuation scheme.
    within the meaning of the Superannuation Industry (Supervision) Act 1993
  • that is a body registered under the Financial Corporations Act 1974.
  • that is a trustee of:
    (i) a superannuation fund; or
    (ii) an approved deposit fund; or
    (iii) a pooled superannuation trust; or
    (iv) a public sector superannuation scheme
    within the meaning of the Superannuation Industry (Supervision) Act 1993 and the fund, trust or scheme has net assets of at least $10 million.
  • that is a listed entity or a related body corporate of a listed entity
  • that is an exempt public authority
  • that is a body corporate, or an unincorporated body, that:
    (i) carries on a business of investment in financial products, interests in land or other investments; and
    (ii) for those purposes, invests funds received (directly or indirectly) following an offer or invitation to the public, within the meaning of section 82 of the Corporations Act 2001, the terms of which provided for the funds subscribed to be invested for those purposes.
  • that is a foreign entity which, if established or incorporated in Australia, would be covered by one of the preceding paragraphs.
I Disagree