After years of being deferred, Solvency II is now almost certain to come into effect on 1 January 2016. Solvency II has far-reaching consequences for insurers. It will affect not only processes and disclosures; capital requirements will also be tightened.

## Solvency II capital requirements for different asset classes


_Source: ING Investment Management_

## Substantially higher capital requirement for equities

An insurance company with a more risky investment portfolio will need to hold a larger capital buffer. The investment policy, traditionally geared to the balance between risk and return, will take on a new dimension, i.e. the solvency capital requirement. The relationship between the capital requirement and investment risk changes the attractiveness of asset classes.

Equity investments, in particular, are subject to a substantially higher capital requirement than bonds, for example. And this at a time when equities can be attractive to many insurers given the current low interest rate environment we are in. Does this mean that equities will become unattractive for insurers?

In this MindScope we show the potential added value of option strategies to investors. A well-designed strategy can considerably reduce the capital requirement for equity investments, without doing too much harm to the expected return.