Implicit Constraints, Incentives, and Systemic Risk Imposed by New Standards for Insurance Regulation


Within the last decade, the regulation of the European insurance sector has been subject to fundamental reforms aimed at the introduction of new risk-based solvency standards. The first new system in this regard came into effect in 2004 in the United Kingdom. Switzerland followed with its Swiss Solvency Test (SST) in 2006. Beyond these regulatory reforms of individual countries, Solvency II, the EU's flagship project to modernize and harmonize European insurance supervision, has entered its final development phase and is planned to come into force in 2013/2014. Although Solvency II is viewed to be one of the most innovative regulatory frameworks currently available, several important aspects with regard to the adopted risk modeling and risk measurement approaches have not been subject to scientific scrutiny yet. In addition, a thorough analysis of constraints and incentives for the behavior of insurance companies arising from the associated regulatory capital charges has not been conducted yet.

Consequently, within this large-scale research project, we intend to address six specific aspects of Solvency II that are of considerable importance for risk managers and policymakers alike. Due to harmonization efforts and the close integration of the Swiss and European economies, particularly through the capital and insurance markets, potential issues associated with Solvency II are also highly relevant for the Swiss Financial Markets Supervisory Authority (FINMA) as well as the Swiss insurance industry. Moreover, there are substantial consequences of insurance regulation for policyholders, since inadequate solvency capital requirements can either cause inefficient reductions in investment or lead to excessive risk taking, thus endangering the stability of the financial system as a whole. With the upcoming introduction of Solvency II, a systematic analysis and discussion of key limitations is a relatively urgent matter. Therefore, we believe that this proposal is very topical.

In the light of heavy lobbying efforts by industry sources, independent academic research constitutes a focal element in the ongoing discussion with regard to the adequacy of the new standards. Our goal is to combine the experience, competencies, and resources of research groups in St. Gallen (Switzerland) and Nürnberg (Germany). The suggested project design aims to maximize valuable spillover and synergy effects between the participants, particularly with regard to key preconditions as well as the employed methodologies and datasets. We are convinced that substantial economies of scope can be realized by channeling the research questions under consideration into one comprehensive grant. Together with an international network of affiliated academics, these aspects will allow to efficiently orchestrate the work on a new series of quality research papers that should have the potential for publication in the leading journals in the area of risk management and insurance.

Additional Informationsunspecified
Commencement Date1 October 2012
Contributors Braun, Alexander (Project Manager); Eling, Martin (Project Manager); Gatzert, Nadine & Schmeiser, Hato (Project Manager)
Datestamp 16 Sep 2022 10:57
Completion Date 31 December 2014
Publications Schmeiser, Hato; Huber, Carin & Gatzert, Nadine (2015) How Does Price Presentation Influence Consumer Choice? The Case of Life Insurance Products. Journal of Risk and Insurance, 82 (2). 401-432. ISSN 0022-4367
Gatzert, Nadine; Schmitt-Hoermann, Gudrun & Schmeiser, Hato (2012) Optimal Risk Classification with an Application for Substandard Annuities. North American Actuarial Journal, 16 (4). 462-486. ISSN 1092-0277
Keywords Insurance Regulation, Solvency II, Portfolio Optimization, Procyclicality, Systemic Risk, Capital Requirements, Interest Rate Guarantees, Credit Risk, Participating Life Insurance
Methods Quantitative Research Methods
Funders SNF – Third Party
Partners Universität Erlangen-Nürnberg
Id 220424
Project Range HSG Internal
Project Status completed
Subjects business studies
Topics Portfolio Optimization under Solvency II: Implicit Constraints posed by the Market Risk Standard Approach, Procyclicality and Systemic Risk in the Solvency II Equity Risk Module, An Integrated View on Capital and Solvency Requirements using an Internal Model, The Influence of Minimum Interest Rate Guarantees and Solvency Requirements on the Asset Allocation of Life Insurance Companies
Project Type fundamental research project
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