Prudent person principle
Solvency II investment rule replacing quantitative limits with an obligation to invest only in assets whose risks the undertaking can identify, measure and manage.
Article 132 of Directive 2009/138/EC of November 25, 2009 (Solvency II) replaced the lists and caps of earlier regimes with the prudent person principle. Those regimes set so many percent in equities, so much in real estate, this category prohibited. The directive has applied since January 1, 2016. The reason is simple: a numerical limit is circumvented by repackaging, and it does not stop an insurer from buying a compliant asset it does not understand. So the principle puts a duty of competence and consistency where the list used to be. An undertaking may invest only in assets whose risks it can identify, measure, monitor, manage and report. The whole portfolio must ensure security, quality, liquidity and profitability, and assets held against liabilities must match their nature and duration. Derivatives are admitted only insofar as they reduce risk or contribute to efficient portfolio management. The price is heavy and often underestimated: everything becomes permitted, but everything must be justified, documented and covered by a written policy. Buying into a new asset class calls for analytical capacity acquired before the investment, not after.
Article 132 of Directive 2009/138/EC. The growth of private credit on European insurers' balance sheets since 2020 illustrates exactly the tension in the principle: no quantitative limit prohibits these assets, but their infrequent valuation and uncertain liquidity oblige the undertaking to prove it can measure them. European supervisors have published several warnings on the point since 2024, not to ban the class, but to remind everyone where the burden of proof sits.
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