Targeting currency risks

Solvency II is expected to impose a specific capital charge on currency mismatches between assets and liabilities for European insurers and re-insurers, bringing currency risk under the regulatory spotlight for the first time. Although forex managers are targeting insurers with hedging products, it is not clear how strong demand will be. Joti Mangat reports

European financial regulation does not move fast. Three years after the European Commission passed Directive 2009/138/EC, adding Solvency II to its regulatory framework, policy-makers continue to assess its potential impact on the European (re)insurance sector. Although the new rules and protracted consultation are primarily concerned with capital adequacy, regulators have taken a particular interest in how foreign exchange movements can impact firms’ asset liability management (ALM).

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