This is partly a design weakness in the text of Solvency II, as the directive does not impose specific constraints on correlation and diversification recognition in internal models per se, but requires this to be thrashed out between firm and supervisor in the approval process. (In contrast, the banking regulatory framework provides such hard, binding constraints on diversification in internal models.)
This implies that, in the present configuration of risks, Europe and all other advanced economies will have to take macroprudential policy much more seriously or they will face the risk of other financial crises that monetary policy cannot prevent. Thank you for your attention. 1 Daly, K., (2016), “A Secular Increase in the Equity Risk Premium”, International Finance 19:2, pp. 179–200.