Responsive Credit Allocation
Insurance companies typically have a large allocation to corporate bonds (“credit”) as the asset class offers a predictable set of cash flows for matching liabilities, and, often, an excess spread after adjusting for expected defaults and downgrades. Credit does however attract regulatory capital under the Solvency II regulations.
Allocation to credit should be responsive to market conditions – increasing when credit offers good value, reducing when spreads become very tight. However, the appropriate allocation to credit is a complex decision that has to balance risk against expected return and consider regulatory capital requirements.