Solvency II has had a significant influence on insurers’ investment strategies by introducing a capital framework that directly links capital charges to asset risk. Under the Standard Formula, different asset classes are assigned capital requirements based on their risk profile—such as market risk, credit risk, and concentration risk. As a result, insurers face higher capital charges for assets deemed riskier, such as equities, illiquid private assets, or lower-rated bonds. This has led many firms to re-evaluate their asset allocation decisions, often resulting in a shift toward lower-volatility, investment-grade fixed income securities to optimise capital efficiency while maintaining solvency ratios.
A notable impact has been the increased focus on liability-driven investment (LDI) strategies. Given Solvency II’s market-consistent valuation approach and the importance of matching asset and liability cash flows, insurers have sought to reduce balance sheet volatility by aligning their investments more closely with the duration and currency of their liabilities. This has led to greater use of long-duration bonds, swaps, and other hedging instruments to manage interest rate and inflation risks. Matching adjustment and volatility adjustment mechanisms have further incentivised insurers to invest in assets with predictable cash flows that can be reliably matched to liabilities, especially in annuity business.
Liquidity
The directive has also influenced insurers’ appetite for illiquid and alternative assets. Although such assets often come with higher capital requirements under the Standard Formula, the long-term and predictable nature of certain illiquid assets—such as infrastructure debt, commercial mortgages, and long-term loans—can make them suitable for matching adjustment portfolios. Insurers using internal models have been able to justify lower capital charges for these assets where justified by robust risk management and modelling capabilities. Consequently, larger firms with internal models or more advanced risk frameworks have increased their exposure to private credit and alternative assets, seeking improved yield in a low-interest-rate environment without materially weakening their solvency position.
Diversification
Diversification has become a more explicit component of investment strategy due to Solvency II’s recognition of risk-reducing effects in the capital calculation. Under the aggregation methodology in the Standard Formula, insurers benefit from diversification across risk modules, encouraging broader and more balanced portfolios. However, the regime also penalises concentration risk, prompting insurers to limit large exposures to individual counterparties or sectors. This dual effect has driven more sophisticated portfolio construction processes, with enhanced risk analytics and asset-level data requirements becoming the norm.
Increased transparency and reporting requirements have further shaped investment strategy by imposing higher operational and compliance burdens on certain asset classes, particularly those that are complex, opaque, or difficult to value. Assets that are easier to classify and report on within the Solvency II quantitative reporting templates (QRTs) are often favoured, especially among smaller insurers without extensive infrastructure to support data-intensive strategies. This has contributed to a preference for standardised, publicly traded instruments and created challenges for investing in some private and structured products without sufficient look-through data.
Overall Effect
Overall, Solvency II has institutionalised a more disciplined, risk-aware approach to investment strategy within the insurance sector. It has encouraged the development of more robust asset-liability management practices, advanced risk modelling capabilities, and heightened focus on capital efficiency. While it has introduced constraints, particularly for firms using the Standard Formula, it has also driven innovation in the use of matching assets, the adoption of alternative investments where appropriate, and the development of more integrated investment and risk management functions.