OptiMA is a software tool developed to optimise and control an insurer's Solvency II Matching Adjustment (MA) portfolio using mathematical techniques rather than brute force. Its results are surprising and take just minutes to reduce a firms' Best Estimate Liabilities (BEL) by up to 1% whilst simultaneously providing control over the outcome of the PRA's tests.

The matching adjustment is an addition to the risk-free rate used to value annuity business under Solvency II, estimated to be worth around £59bn to insurance firms in the UK. It is based primarily on the credit spreads in excess of default and downgrade costs of credit assets held to back annuity liabilities.

Two significant features of the Solvency II matching adjustment requirements are

• The ring-fencing of assets within the MA fund and hypothecation of these assets between three components, A, B and C, of which only component A is used to calculate the MA. Tight regulations around eligibility criteria and the ability to release assets from the ring-fenced fund also create additional operational considerations.
• Firms are required to demonstrate (on a monthly basis) that their MA portfolio satisfies a number of PRA tests. Should the portfolio fail to meet the PRA tests, the firm has a period of two months to ensure the tests are met or risk losing the MA for two years. With an industry value estimated at £59bn, this represents a material operational risk.

Maximising the MA for the given ring-fenced assets presents an optimisation opportunity. But with typical investment portfolios containing hundreds of bonds and other assets, manual optimisation can be challenging and time-consuming with no guarantee of an optimal result. Furthermore, it must be done in a manner that ensures the fund continues to pass the PRA tests. OptiMA is designed to solve this challenge for insurers.