David Antonius Pankoke

We analyse the costs and benefits of financial regulation based on a survey of 76 insurers from Austria, Germany and Switzerland. Our analysis includes both established and new empirical measures for regulatory costs and benefits. This is the first paper that tries to take costs and benefits combined into account using a latent class regression with covariates. Moreover, we analyse regulatory costs and benefits not only on an industry level, but also at the company level. This allows us to empirically test fundamental principles of financial regulation such as proportionality: the intensity of regulation should reflect the firm-specific amount and complexity of the risk taken. Our findings do not support the proportionality principle; for example, regulatory costs cannot be explained by differences in business complexity. One potential policy implication is that the proportionality principle needs to be more carefully applied to financial regulation.

This article reviews the extant research on systemic risk in the insurance sector and outlines new areas of research in this field. We summarize and classify 48 theoretical and empirical research papers from both academia and practitioner organizations. The survey reveals that traditional insurance activity in the life, nonlife, and reinsurance sectors neither contributes to systemic risk nor increases insurers’ vulnerability to impairments of the financial system. However, nontraditional activities (e.g., credit default swap underwriting) might increase vulnerability, and life insurers might be more vulnerable than nonlife insurers due to higher leverage. Whether nontraditional activities also contribute to systemic risk is not entirely clear; however, the activities with the potential to contribute to systemic risk include underwriting financial derivatives and providing financial guarantees. This article is not only likely of interest to academics but also highly relevant for the industry, regulators, and policymakers.

This paper analyzes the equity risk module of Solvency II, the new regulatory framework in the European Union. The equity risk module contains a symmetric adjustment mechanism called equity dampener which shall reduce procyclicality of capital requirements and thus systemic risk in the insurance sector. We critically review the equity risk module in three steps: we first analyze the sensitivities of the equity risk module with respect to the underlying technical basis, then work out potential basis risk (i.e., deviations of the insurers actual equity risk from the Solvency II equity risk), and-based on these results-measure the impact of the symmetric adjustment mechanism on the goals of Solvency II. The equity risk module is backward looking in nature and a substantial basis risk exists if realistic equity portfolios of insurers are considered. Both results underline the importance of the own risk and solvency assessment (ORSA) under Solvency II. Moreover, we show that the equity dampener leads to substantial deviations from the proposed 99.5% confidence level and thereby reduce procyclicality of capital requirements. Our results are helpful for academics interested in regulation and risk management as well as for practitioners and regulators working on the implementation of such models.

Wir vergleichen die Ausgestaltung des deutschen Aufsichtsrats und des schweizerischen Verwaltungsrats und die besonderen Regelungen für Versicherer in diesen beiden Ländern. Die Regulierung beider Gremien ist ähnlich, wobei das Mandat des Verwaltungsrats grundsätzlich umfangreicher ist als das des Aufsichtsrats. Schweizer Richtlinien haben meist einen weniger bindenden Charakter als die deutschen und lassen dem Versicherungsunternehmen mehr Freiraum. Wir nehmen eine Evaluation der Regulierung anhand wissenschaftlicher Studien vor und schlussfolgern, dass die Schweizer Regulierung passgenauer und effektiver erscheint. Des Weiteren vergleichen wir die Regulierung der Aufsichtsgremien von Versicherungsunternehmen je nach Rechtsform. In beiden Ländern ist die Regulierung für börsenkotierte Aktiengesellschaften am meisten ausgeprägt, wobei die Unterschiede generell eher gering sind.

Although every company has discontinued business, its active management is a relatively new topic in practice and an entirely new field of study in academia. Based on a survey of 85 non-life insurers from Germany, Switzerland, Austria, and Luxembourg, we empirically test the market development and find indication that Swiss insurers seem to have more experience with the active management of discontinued business than insurers in other countries. We explain this phenomenon by that country's more advanced solvency capital requirements that better reflect the risk of discontinued business activities. We thus conclude that with the introduction of Solvency II, active management of discontinued business will become more important since insurers will have to hold higher equity capital for discontinued business portfolios. We illustrate this fact within a numerical example which shows that 23 % of the Solvency II non-life premiums and reserve risk can be traced back to discontinued business.

With respect to the insurance sector, Eling and Pankoke (2014) review 43 theoretical and empirical research papers on systemic risk and suggest several other areas of research that would be useful in this field. We build upon and extend the results by Eling and Pankoke (2014) as follows: After a discussion of the term ‘systemic risk' and a review of the extant research results on systemic risk in the insurance sector, we analyse the implications of this discussion for macroprudential supervision. For this purpose, we evaluate the relevance of banking-sector macroprudential instruments to the insurance sector. Moreover, we discuss to what extent systemic risk might be triggered by regulation itself, especially by Solvency II, the forthcoming European-wide regulatory framework for risk-based capital. Finally, in the last section we provide a summary of the points made in this chapter.

This paper evaluates whether sophisticated or simple systemic risk measures are more suitable in identifying which institutions contribute to systemic risk. In this investigation, DCoVaR, Marginal Expected Shortfall (MES), SRISK and Granger-Causality Networks are considered as sophisticated systemic risk measures. Market capitalization, total debt, leverage, the stock market returns of an institution, and the correlation between the stock market returns of an institution and the market, are considered as simple systemic risk measures. Systemic relevance is approximated by the receipt of financial support during the financial crisis and the classification, as a systemically important institution, by national or international regulators. The analyses are performed for all companies included in the S&P 500 composite index. The findings suggest that simple systemic risk measures have more explanatory power than sophisticated risk measures. In particular, total debt is found to be the most suitable indicator to detect institutions which contribute to systemic risk, according to the explanatory power and model fit. The most suitable sophisticated risk measure seems to be SRISK.