Return on Risk-Adjusted Capital Under Solvency II: Implications for the Asset Management of Insurance Companies
Journal
Geneva Papers on Risk and Insurance - Issues and Practice
ISSN
1018-5895
Type
journal article
Date Issued
2018-07-01
Author(s)
Abstract (De)
We derive a European life insurer’s return on risk-adjusted capital (RORAC) under the Solvency II capital requirements. To do so, we draw on historical time series data and construct a large number of asset allocations, taking into account current portfolio shares of the German life insurance industry. Subsequently, we determine expected profits and market risk capital charges by means of the standard formula. Our results indicate that the RORAC is mainly driven by the capital requirements, while the expected profits are almost irrelevant. Moreover, we show that less-diversified portfolios with high asset risk need to be backed by low capital buffers and therefore result in high RORAC values. Well-diversified portfolios with balanced risk–return profiles, on the other hand, involve higher capital charges and thus achieve low RORAC figures. Hence, under Solvency II, a RORAC-based performance measurement may have detrimental effects for a life insurer’s stakeholders.
Language
English
HSG Classification
contribution to scientific community
Refereed
Yes
Publisher
Palgrave Macmillan Ltd.
Volume
43
Number
3
Start page
456
End page
472
Subject(s)
Division(s)
Eprints ID
256851