Insurance asset allocation and regulatory compliance in the Moroccan context : analysis of the effects of proportions

Abstract

The implementation of Moroccan Solvency II is nearly completed. The draft circular on the new prudential framework for Risk-Based Solvency will result in higher capital requirements. The aim of this work is to optimize the asset allocation of an insurance company in the context of classical portfolio theory when the firm has to comply with new regulatory requirements in terms of market risk capital. The analysis begins with a brief examination of the basic Markowitz model and the standard formula as provided by the regulator. We then estimate the risk-return pairs for the main asset categories held by a Moroccan life insurer, which serves as our case study, and execute two optimization programs: one with no proportional constraints and the other with proportional constraints. Subsequently, we incorporate the capital charges covering market risk and execute two additional optimization programs. Our results exhibit significant differences in terms of returns. Models based on the new regulatory constraint prove to be more profitable than those based on classical theory. However, strategic adjustments are necessary to balance the level of capital and portfolio returns.