Evaluation of Benefits and Costs of Insurance Regulation - A Conceptual Model for Solvency II

Ensuring future payments to policyholders is of essential importance in the insurance business model. In order to provide a high safety level, the insurance industry faces particularly severe regulations by state authorities via varying means. These come with substantial benefits and costs for all affected stakeholder groups. However, it is in itself not clear if the benefits outweigh the costs. In this paper, we focus on the introduction of the Solvency II framework as a new regulatory measure and adopt a policyholder's point of view in our economic model. In the context of Solvency II, we compare the policyholder's willingness to pay for the higher safety level (i.e., a valuation of benefits of Solvency II) with the estimated costs mentioned in the literature for the new regulatory standard. Three different models are used to assess the policyholders' willingness to pay. These are (i) a behavioural approach, (ii) an option pricing model, as well as (iii) a utility-based model. Our analyses raise doubts about whether the estimated costs of the Solvency II framework are lower than the costs policyholders are willing to pay for an increased safety level due to Solvency II.