Ardea Investment Management, a fixed income specialist, has launched a new tool developed specifically for optimising insurance portfolios and which addresses the complex asset allocation problem faced by insurers.
According to the announcement, introducing the capital charge to the portfolio optimisation process creates a complex multi-objective optimisation problem unsolvable by traditional financial models.
Ardea’s new tool has been optimised across the three dimensions of market risk, return and regulatory capital, also taking liabilities into account. This, according to Arde, is an improvement on the existing traditional 2-dimensional techniques used to date.
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, the company noted
Dr Laura Ryan, Head of Research, 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.”
Stephen Clout, CEO and co-founder, Ardea Investment Management, added: “The tool was developed to form a central part of our service offering to insurance clients and has been utilised by our clients for manager selection purposes and to understand how different asset classes may impact a portfolio.”
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.