Keywords
regulatory constraints
portfolio diversification
portfolio optimization
Conditional Value at Risk (CVaR).
How to Cite
Abstract
Purpose – To examine whether regulatory limits allow (re)insurance companies to build adequately diversified portfolios capable of expanding the efficient frontier and generating superior risk-adjusted returns under different macroeconomic scenarios. Using counterfactual simulations with and without regulatory constraints, the study assesses how solvency regulations affect portfolio risk and financial performance.
Theoretical framework – The study is grounded in Modern Portfolio Theory and incorporates coherent risk measures, particularly Conditional Value at Risk (CVaR). The theoretical framework discusses the relationship between risk management, solvency requirements, and regulatory constraints in the insurance industry.
Design/methodology/approach – Mean-CVaR optimization models were estimated to identify optimal portfolio allocations that preserve insurers' solvency while evaluating how changes in the allocation of admissible assets affect financial performance. In addition, the probability of adverse short-term outcomes was estimated. The analysis is based on daily data for 13 market indices covering the period from 2014 to 2025.
Findings – The regulatory framework ensures solvency and financial stability but limits diversification under low-interest-rate environments, thereby constraining risk-adjusted returns. Unconstrained portfolios achieved higher returns and greater diversification. A moderate allocation (1-5%) to alternative assets expanded the efficient frontier without substantially increasing portfolio risk.
Research Practical & Social implications – The findings suggest that regulatory requirements should be periodically reassessed to better balance prudential oversight and portfolio efficiency. Greater regulatory flexibility may allow insurers to optimize asset allocation without compromising solvency.
Originality/value – This study provides evidence of the direct effects of regulatory constraints on portfolio diversification, solvency, and risk-adjusted returns, contributing to ongoing discussions on prudential regulation and asset management in the Brazilian (re)insurance industry.
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