The role of asset allocation in mitigating investment income volatility for Maltese life insurers

Abstract

The impact of differences in asset allocation on the stability of investment income from life insurance companies in Malta was investigated in this study. Observing the impact of keeping a balanced portfolio on returns and uncertainty, as well as confirming whether firm capital reserves and Solvency II compliance contribute to financial stability, were the goals of the study. The data was derived from the financial statements of five primary life insurers in Malta from 2018 to 2023. Using tools such as descriptive statistics, correlation analysis, regression modeling, and sensitivity analysis available in Python, it was possible to determine the relationship between investments in asset classes, equities, debt, real estate, private equities, and hedge funds and the stability of investment income. The research findings revealed that the higher the value of debt and real estate a portfolio was correlated with more stable income while the higher the value of the equities in a portfolio or the other alternative asset in portfolio was equally associated with income change. Holding capital reserves and, about the Solvency II requirements, was proven to stabilize the incomes of the insurance companies, making it necessary to check and prevent risks periodically. The study concludes that local regulators and firms should aim to ensure that smaller insurers diversify their risks, thereby allowing them to continue operating and providing for their policyholders even when market conditions evolve.