Vincent D's List: Solvency II Products

• Examples of innovation included GuardInvest, which also brought transparency and simplicity. The Theam Harewood GuardInvest Euro Equity offered sustainable long-term equity investments with lower risk. In this case, call options triggered by market conditions provided partial exposure to equities. Funds under management of €9.34 million by September 5 this year came from an open-ended investment with a recommended three-year term. Retail and professional investors benefited from a quarterly protection of more than 90% of the fund's value at the previous year's recorded level.

   

  This guarantee on maximum loss cuts Solvency II capital requirements to 10% for GuardInvest against 39% for a direct Euro Stoxx 50 investment.

• We did a big study on the best way to invest in equities under Solvency II and we compared the different equity options strategies insurers would be implementing. We ran a lot of simulations to determine the average internal rate of return of the various investments, net of the average cost of Solvency II capital," explains Antony
• We found that investing in medium- to long-term capital guaranteed products with indexation to equity performance was the most efficient method. The long-term guarantee provided significant capital relief, while enabling the companies to benefit significantly from positive equity performances,"
• One of these is Titanium – a product that offers an equity investment with a capital guarantee that pays out like a bond, with annual coupons exposed to yearly equity performance through a volatility adjustment. The structure is equivalent to a monthly covered call strategy that finances an annual put option, but is more capital efficient
• If you can provide any kind of principal protection – not necessarily 100% protection – there could be a benefit compared with an unprotected asset. We're spending a lot of time internally looking at the cost and benefit of protection and whether it makes sense for insurance companies," says Andrew Berman, co-head of European insurance and pension sales at Deutsche Bank in London.

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• lso highlights the importance of credit quality of the product that insurers invest into, which could lead to Ucits-compliant funds becoming a preferred investment vehicle where investments are fully collateralised with no or limited credit risk exposure.
• It found that investing in medium- to long-term capital guaranteed products with indexation to equity performance was the most efficient, because the long-term guarantee provided significant capital relief while enabling the companies to benefit from positive equity performances. The report concluded that an average risk-adjusted performance was significantly better than a direct equity investment.
• This development highlights a trend, and may encourage closer collaboration between the two industries. As banks continue developing more sophisticated structured solutions for insurers, the capacity for products to balance lower capital requirements and return on investment will be key to their success when the regulations are finally introduced.

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