The unprecedented financial crisis which began to unfold in the summer of 2007 precipitated the most widespread and in some ways deepest global recession on record. It was therefore unsurprising that this triggered a fundamental reconsideration of financial regulation across Europe, North America and further afield. The proposed Solvency ll regulations represent one crucial example of this reconsideration and will require the insurance sector for the first time to make explicit linkage between their capital provisions and the demonstrated risk associated with each of the asset classes in which they are invested.
Real estate investment has always figured significantly in the portfolios of insurance companies and, as a consequence of this, a key group of European Trade Associations, supporting both the insurance industry and real estate investors, approached IPD to provide essentially two types of research support for the review and refinement of the proposed regulations.
1. An overview of the proposed regulatory framework and a survey of the initial insurance industry responses to it. The overview has been designed to provide an academic research review of the scope, relevance and impact of the new regulations in the context of the currently available investment market information describing the performance of property throughout Europe.
In addition the initial responses of the insurance industry to date are tapped through a qualitative survey of key members of the Solvency ll teams in major companies throughout Europe.
2. An enhancement of the property information infrastructure required to permit a fair and prudent basis for risk related regulation. This second strand to the research has involved exploratory work by IPD aimed at extending its current range of performance measurement data services across Europe into two main spheres.
The first of these has been the development of enhanced valuation based indices, reported on a consistent quarterly basis, for all major mainland European markets (to complement those already published for the UK, the Netherlands and Ireland). The second has taken the form of early stage developmental work aimed at linking transaction evidence with the valuation indices to address the demonstrated smoothing effects of real estate valuation upon market track records.
This report therefore provides a broad review of the EIOPA proposed approach to establishing capital requirements for real estate held in insurance company portfolios. It summarises the responses to a European scale survey of insurance company Solvency ll team feedback. It describes the work completed to date exploring the possibility of developing a pan European quarterly direct property index from existing IPD data series. And it reports progress on IPD research into transaction-linked indices for the purpose of risk adjusting major European performance series using transactions evidence.
Source : IPD