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Developing New Risk-Based Capital Standards Across Europe
Type
fundamental research project
Start Date
01 January 2007
End Date
31 December 2008
Status
completed
Keywords
Finance
Insurance
Risk Management
Performance Measurement
Swiss Solvency Test
Solvency II
Asset Liability Management
Dynamic Financial Analysis
Simulation
Description
Insurance supervision in the European Union is undergoing significant changes as the European Commission works toward harmonization across member countries as well as toward the implementation of standards that are appropriate for a rapidly changing marketplace. Current efforts are focused on Solvency II regulations, which aim at being the foundation of EU insurance regulation in the 21st century. Solvency II will require an enterprise risk management approach and risk-based calculations of the required minimum equity capital. So as not to suffer any competitive disadvan-tage, the Swiss Federal Office of Private Insurance recently introduced the Swiss Solvency Test, a system very comparable to the Solvency II regulations.
However, outlining the details of Solvency II and the Swiss Solvency Test, we find that there is no research using European data that investigates the pros and cons of different regulatory systems. Thus, there is an urgent need for work on the success, or lack thereof, of different solvency models in measuring financial distress. Existing evidence suggests that the risk-based capital standards introduced in the United States in 1994 are not very successful. The model recently introduced by the German Insurance Association, the new Swiss model, and the models currently employed in the United Kingdom and the Netherlands may be better systems, but we cannot state which is best until the research is undertaken. Furthermore, research on the influence of market factors, such as rating agencies, should be considered as U.S. experience suggests that rating agencies have been more successful in identifying financial dis-tress than has the regulatory framework. In addition, no one has yet analyzed the economic effects of the planned solvency regulations e.g. on European capital mar-kets. Hence there is a great need for further research.
We intend to do that research. Our goal is to give practical aid to the decisionmakers responsible for formulating an effective set of regulations and to encourage additional research on best practices for successful capital standards.
However, outlining the details of Solvency II and the Swiss Solvency Test, we find that there is no research using European data that investigates the pros and cons of different regulatory systems. Thus, there is an urgent need for work on the success, or lack thereof, of different solvency models in measuring financial distress. Existing evidence suggests that the risk-based capital standards introduced in the United States in 1994 are not very successful. The model recently introduced by the German Insurance Association, the new Swiss model, and the models currently employed in the United Kingdom and the Netherlands may be better systems, but we cannot state which is best until the research is undertaken. Furthermore, research on the influence of market factors, such as rating agencies, should be considered as U.S. experience suggests that rating agencies have been more successful in identifying financial dis-tress than has the regulatory framework. In addition, no one has yet analyzed the economic effects of the planned solvency regulations e.g. on European capital mar-kets. Hence there is a great need for further research.
We intend to do that research. Our goal is to give practical aid to the decisionmakers responsible for formulating an effective set of regulations and to encourage additional research on best practices for successful capital standards.
Leader contributor(s)
Funder(s)
Topic(s)
Finance
Insurance
Risk Management
Performance Measurement
Swiss Solvency Test
Solvency II
Asset Liability Management
Dynamic Financial Analysis
Simulation
Method(s)
Theoretical and empirical research on insurance economics and management
Range
HSG Internal
Range (De)
HSG Intern
Division(s)
Eprints ID
30550
9 results
Now showing
1 - 9 of 9
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PublicationType: newspaper articleJournal: VersicherungswirtschaftVolume: 63Issue: 19
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PublicationType: newspaper articleJournal: Zeitschrift für das gesamte KreditwesenVolume: 15Issue: 59
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PublicationType: journal articleJournal: Der FinanzbetriebVolume: 9Issue: 5
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PublicationType: newspaper articleJournal: I.VW Management-InformationVolume: 24Issue: 3
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PublicationType: newspaper articleJournal: I.VW Management InformationVolume: 28Issue: 4
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PublicationCombining Fair Pricing and Capital Requirements for Non-Life Insurance CompaniesThe aim of this article is to identify fair equity-premium combinations for non-life insurers that satisfy solvency capital requirements imposed by regulatory authorities. In particular, we compare "target capital" derived using the "value at risk" concept as planned for Solvency II in the European Union with the "tail value at risk" concept as required by the Swiss Solvency Test. The model framework uses Merton's jump-diffusion process for the market value of liabilities and a geometric Brownian motion for the asset process; valuation is conducted using option pricing theory. In this setting, we study the impact of model parameters and corporate taxation on fair pricing, solvency capital requirements, and shortfall probability for different safety levels measured by the default put option value. We show that even though corporate taxes can have a substantial impact on pricing and capital structure, they do not affect capital requirements if the safety level is retained before and after taxation.Type: journal articleJournal: Journal of Banking and FinanceVolume: 32Issue: 12
Scopus© Citations 26 -
PublicationEnterprise Risk Management in Finacial Groups: Analysis of Risk Concentration and Default RiskIn financial conglomerates and insurance groups, enterprise risk management is becoming increasingly important in controlling and managing the different independent legal entities in the group. The aim of this paper is to assess and relate risk concentration and joint default probabilities of the group's legal entities in order to achieve a more comprehensive picture of an insurance group's risk situation. We further examine the impact of the type of dependence structure on results by comparing linear and nonlinear dependencies using different copula concepts under certain distributional assumptions. Our results show that even if financial groups with different dependence structures do have the same risk concentration factor, joint default probabilities of different sets of subsidiaries can vary tremendously.Type: journal articleJournal: Financial Markets and Portfolio ManagementVolume: 22Issue: 3
Scopus© Citations 19 -
PublicationUnderstanding Price Competition in German Motor InsuranceThis paper analyzes price competition in the German motor insurance market since 1994 and looks for evidence to back up a claim frequently found in the trade literature-that there have been two recent price wars in this industry, the first in 1996-1999, the second in 2005-2006. In a first step, we analyze development of the German motor insurance market and compare it to that of other property-liability lines of business. In a second step the applicability of price war definitions found in the marketing literature to the German motor insurance market is checked. In a third step, a comparison to reference cases from other industries, where price wars have been subject to academic analysis, is conducted to complement the analysis. We conclude that, contrary to reports in the trade literature, the periods of 1996-1999 and 2005-2006 should be considered as times of in-tense competition in the motor insurance industry, not as times of price war.Type: journal articleJournal: Zeitschrift für die gesamte VersicherungswissenschaftVolume: 97Issue: Supplement 1
Scopus© Citations 11