Dutch insurers continue to invest less in bonds
Insurers in the Netherlands continued to sell direct investments in bonds in 2023, new figures from DNB show. For the fourth year in a row, insurers sold more bonds than they bought.
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Should insurers use a volatility adjustment (VA) in their internal models that does not change over time, or are they allowed to model a dynamic VA?
When using an internal model to calculate the Solvency II capital requirements, insurers must estimate their technical provisions one year after the reporting date. They may apply a VA in the relevant interest rate term structure, which must then be modelled in an internal model. DNB allows the use of a constant as well as a dynamic VA for modelling purposes. However, for dynamic a VA, which moves with the relevant spreads, certain conditions apply.
Naturally, when an insurer asks DNB for permission to use an internal model, DNB will assess, on a case-by-case basis, whether that insurer satisfies all requirements and applies all good practices with regard to internal models as listed in the Solvency II Directive.
Concerning the VA, DNB will generally assess whether all risks and uncertainties surrounding the modelling, the source data and the parameters relating to the VA and the resulting capital requirement (SCR) are adequately addressed in the modelling process and risk management. When applying for permission to use an internal model, an insurer must demonstrate that it has explicitly addressed these risks and uncertainties or that it has, at least, implicitly done so, for example by limiting the VA (or its application ratio). It must address all model components in relation to the VA.
In assessing the VA, DNB will also consider the modelling of risks arising from government bonds (sovereign exposures). An insurer must make allowance for sovereign exposures in its internal model, taking into account how it has modelled the VA. If an insurer opts to apply an internal model with a dynamic VA, it must incorporate all sovereign risk exposures and other spread-sensitive investments in full.
In particular, DNB will assess whether an insurer has given appropriate consideration to the following issues in its modelling, risk management and public disclosure in relation to the VA.
Pursuant to Article 37(1)(d) of the Solvency II Directive, DNB may consider to set a capital add-on if it concludes that the insurer's risk profile deviates significantly from the assumptions underlying the volatility adjustment.
Insurers in the Netherlands continued to sell direct investments in bonds in 2023, new figures from DNB show. For the fourth year in a row, insurers sold more bonds than they bought.
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Read moreDutch institutional investors such as pension funds, investment funds and insurers kept their investments in risky bonds roughly the same over the past 12 months. This is a break from previous years: since 2019, large investors had expanded their exposure to what are termed high-yield bonds.
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