A new optimisation approach to assess optimal asset allocation in European non-life insurance companies

Abstract

This study addresses the allocation of optimal assets in non-life insurance companies' environment with a new vision. Most previous studies are based on the maximisation of the utility function. However, in this paper, we focused on the maximisation of technical efficiency (TE). In order to validate our objective, we select a set of European non-life insurance companies (ENIC) over the period 2008-2014. In the first step, we estimate the production function characterised by the directional output distance function (DODF). In the second one, we use two metaheuristics (PSO and GA) to assess the optimal asset allocation (OAA). The empirical results show that the proportion allocated to the 'alternative investment with high-risk high-return' (AIhh) is on average lower than those found in previous studies. However, the percentage allocated to the 'risk-free assets' (RFA) is on average different from zero. This can be explained by the attention given to the competitiveness, survival and long-term profitability respecting the maximisation of TE. So, any insurance company must give more attention to the presence of different stakeholders and resolve the conflicts of interest between them.