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The Impact of Private Equity on a Life Insurer's Capital Charges under Solvency II and the Swiss Solvency Test

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abstract In this paper, we conduct an in-depth analysis of the impact of private equity investments on the capital requirements faced by a representative life insurance company under Solvency II as well as the Swiss Solvency Test. Our discussion begins with an empirical performance measurement of the asset class over the period from 2001 to 2010, suggesting that limited partnership private equity funds may be suited for the purpose of portfolio enhancement. Subsequently, we review the market risk standard approaches set out by both regulatory regimes and outline a potential framework for an internal model. Based on an implementation of these solvency models, it is possible to demonstrate that private equity is overly penalized by the standard approaches. Hence, life insurers aiming to exploit the asset class’s return potential may expect significantly lower capital charges when applying an economically sound internal model. Finally, we show that, from a regulatory capital perspective, it can even be less costly to increase the exposure to private rather than public equity.
   
type journal paper
   
keywords Capital Requirements, Life Insurance, Portfolio Choice, Private Equity, Insurance Regulation, Solvency II, Swiss Solvency Test
   
language English
kind of paper journal article
date of appearance 17-2-2014
journal Journal of Risk and Insurance
publisher Wiley Blackwell (Malden, Mass., USA)
ISSN 0022-4367
ISSN (online) 1539-6975
DOI 10.1111/j.1539-6975.2012.01500.x
volume of journal 81
number of issue 1
page(s) 113-158
review double-blind review
   
citation Braun, A., Schmeiser, H., & Siegel, C. (2014). The Impact of Private Equity on a Life Insurer's Capital Charges under Solvency II and the Swiss Solvency Test. Journal of Risk and Insurance, 81(1), 113-158, DOI:10.1111/j.1539-6975.2012.01500.x.