Ardea Investment Management launches insurance portfolio optimisation tool

Written by Adam Cadle

10/10/2022

Ardea Investment Management has launched a new software application which allows insurers to optimise their asset allocation across the three competing objectives of return, market risk and regulatory capital as defined under the Solvency II framework.

The proprietary algorithm behind the tool was developed in-house by Ardea’s quantitative research team in conjunction with researchers from the University of Sydney and combines various engineering and machine learning techniques.

"Introducing the capital charge to the portfolio optimisation process creates a complex multi-objective optimisation problem unsolvable by traditional financial models," the investment manager said in a statement.

"By improving on the existing traditional 2-dimensional techniques used to date, the new tool optimises across the three dimensions of market risk, return and regulatory capital, and also takes liabilities into account. The result is an optimisation technique which exceeds the capacity of existing financial models, developed specifically for optimising insurance portfolios and which addresses the complex asset allocation problem faced by insurers."

The tool also has the ability to determine the capital charge under various market regimes, scenario modelling and gauging the impact of draft changes to regulatory requirements such as the proposed climate charges under Solvency II.

Dr Laura Ryan, head of research at Ardea Investment Management, commented: “The asset allocation problem for insurers is an incredibly difficult one. Not only do they have to match their assets with their liabilities, but they also have to generate a return for their shareholders. And then on top of this, the regulatory capital requirements need to be considered.

“The recent market conditions, with low yields and low credit spreads, meant insurers were faced with investing in assets that attracted a higher capital charge. In the current market environment with rising yields and higher market volatility, insurers need to be able to adjust their asset allocation in a more dynamic fashion. The tool allows 3D optimisation which will support insurance companies who are looking for return seeking assets.”

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