scholarly journals The standard formula of Solvency II: a critical discussion

2020 ◽  
Author(s):  
Matthias Scherer ◽  
Gerhard Stahl
Keyword(s):  
Business Models ◽  
Solvency Ii ◽  
Critical Discussion ◽  
Equal Treatment ◽  
Insurance Companies ◽  
Economic Activities ◽  
Large Circle ◽  
Standard Formula ◽  
European Insurance ◽  
Solvency Assessment

AbstractEstablishing a standard formula (SF) for the regulation of European insurance companies is a Herculean task. It has to acknowledge very different business models and national peculiarities. In addition, regulatory authorities—as a stakeholder on their own—have a number of supervisory objectives the SF should incentivize. With the intervention of the SF in economic activities, the principle of equal treatment must be maintained. The large circle of users makes its procedural simplicity indispensable to ensure that it is applied and implemented in a proportionate manner. Above all, the SF should be risk-sensitive. Compared to Solvency I, the SF of Solvency II is considered a significant improvement, as many of the aforementioned desiderata have been much better realized. The following analysis and survey of model-theoretical aspects of the SF shows that these improvements could be achieved above all with regard to epistemic uncertainties. The stochastic model underneath the SF is still subject to considerable uncertainties; so that the probability functional of the SF is exposed to significant model risk. As part of the Own Risk and Solvency Assessment (ORSA), insurance companies must prove the adequacy of the SF for their company. The vague prior knowledge represented by the stochastic component of the SF is not sufficient for an SF intrinsic validation of the aleatoric component.

Enterprise risk management and Solvency II: the system of governance and the Own Risk and Solvency Assessment

2020 ◽  
Vol 21 (4) ◽  
pp. 317-332 ◽  
Author(s):  
Pablo Durán Santomil ◽  
Luis Otero González
Keyword(s):  
Risk Management ◽  
Insurance Industry ◽  
Solvency Ii ◽  
Enterprise Risk Management ◽  
Insurance Companies ◽  
Legal Form ◽  
Content Type ◽  
Enterprise Risk ◽  
Solvency Assessment

Purpose The purpose of this paper is to analyze how enterprise risk management (ERM), the system of governance and the Own Risk and Solvency Assessment (ORSA) have been boosted with the entry of Solvency II. Design/methodology/approach For this analysis, the authors have undertaken a survey of chief risk officers (CROs) working in Spanish insurance companies. Findings The results show that Solvency II has definitely promoted ERM in the European insurance industry and improved the system of governance of the insurance companies, and that the perceived value of the ORSA for the companies is higher than the cost. It is clear that the quality of ERM implemented by companies is higher in those that face more complex risks and with greater interdependencies – that is, larger companies, foreign insurers and insurers with several lines of business – but is unaffected by the legal form of the entity (mutual/corporation). Originality/value This study conducts primary research with surveys of CROs and develops a measure of the quality of ERM implemented by insurance companies.

scholarly journals Economic Scenario Generators and Solvency II

2011 ◽  
Vol 16 (1) ◽  
pp. 121-159 ◽  
Author(s):  
E. M. Varnell
Keyword(s):  
Internal Model ◽  
Building Blocks ◽  
Solvency Ii ◽  
Capital Requirements ◽  
Insurance Companies ◽  
Senior Managers ◽  
Insurance Contracts ◽  
Insurance Firms ◽  
Market Consistent Valuation ◽  
European Insurance

AbstractThe Solvency II Directive mandates insurance firms to value their assets and liabilities using market consistent valuation. For many types of insurance business Economic Scenario Generators (ESGs) are the only practical way to determine the market consistent value of liabilities. The directive also allows insurance companies to use an internal model to calculate their solvency capital requirement. In particular, this includes use of ESG models. Regardless of whether an insurer chooses to use an internal model, Economic Scenario Generators will be the only practical way of valuing many life insurance contracts. Draft advice published by the Committee of European Insurance and Occupational Pensions Supervisors (CEIOPS) requires that insurance firms who intend to use an internal model to calculate their capital requirements under Solvency II need to comply with a number of tests regardless of whether the model (or data) is produced internally or is externally sourced. In particular the tests include a ‘use test’, mandating the use of the model for important decision making within the insurer. This means that Economic Scenario Generators will need to subject themselves to the governance processes and that senior managers and boards will need to understand what ESG models do and what they don't do. In general, few senior managers are keen practitioners of stochastic calculus, the building blocks of ESG models. The paper therefore seeks to explain Economic Scenario Generator models from a non-technical perspective as far as possible and to give senior management some guidance of the main issues surrounding these models from an ERM/Solvency II perspective.

scholarly journals Capital regulation and systemic risk in the insurance sector

2018 ◽  
Vol 10 (2) ◽  
pp. 237-263 ◽  
Author(s):  
Thomas Gehrig ◽  
Maria Chiara Iannino
Keyword(s):  
Systemic Risk ◽  
Banking Sector ◽  
Financial System ◽  
Solvency Ii ◽  
Insurance Companies ◽  
Capital Regulation ◽  
Content Type ◽  
Insurance Sector ◽  
Main Challenge ◽  
European Insurance

Purpose This paper aims to analyze systemic risk in and the effect of capital regulation on the European insurance sector. In particular, the evolution of an exposure measure (SRISK) and a contribution measure (Delta CoVaR) are analyzed from 1985 to 2016. Design/methodology/approach With the help of multivariate regressions, the main drivers of systemic risk are identified. Findings The paper finds an increasing degree of interconnectedness between banks and insurance that correlates with systemic risk exposure. Interconnectedness peaks during periods of crisis but has a long-term influence also during normal times. Moreover, the paper finds that the insurance sector was greatly affected by spillovers from the process of capital regulation in banking. While European insurance companies initially at the start of the Basel process of capital regulation were well capitalized according to the SRISK measure, they started to become capital deficient after the implementation of the model-based approach in banking with increasing speed thereafter. Practical implications These findings are highly relevant for the ongoing global process of capital regulation in the insurance sector and potential reforms of Solvency II. Systemic risk is a leading threat to the stability of the global financial system and keeping it under control is a main challenge for policymakers and supervisors. Originality/value This paper provides novel tools for supervisors to monitor risk exposures in the insurance sector while taking into account systemic feedback from the financial system and the banking sector in particular. These tools also allow an evidence-based policy evaluation of regulatory measures such as Solvency II.

scholarly journals Solvency II Calibrations: Where Curiosity Meets Spuriosity

2016 ◽  
Author(s):  
Stefan Mittnik
Keyword(s):  
Significant Risk ◽  
Solvency Ii ◽  
Capital Requirements ◽  
Insurance Companies ◽  
Individual Risk ◽  
Standard Formula ◽  
Standard Scr ◽  
Solvency Capital ◽  
The Individual ◽  
Parameter Values

The Solvency II regulatory framework specifies procedures and parameters for determining solvency capital requirements (SCRs) for insurance companies. The proposed standard SCR calculations involve two steps. The Value–at–Risk (VaR) of each risk driver is measured and, in a second step, all components are aggregated to the company’s overall SCR, using the Standard Formula. This formula has two inputs: the VaRs of the individual risk drivers and their correlations. The appropriate calibration of these input parameters has been the purpose of various Quantitative Impact Studies that have been conducted during recent years. This paper demonstrates that the parameter calibration for the equity–risk module—overall, with about 25%, the most significant risk component—is seriously flawed, giving rise to spurious and highly erratic parameter values. As a consequence, an implementation of the Standard Formula with the currently proposed calibration settings for equity–risk is likely to produce inaccurate, biased and, over time, highly erratic capital requirements.

NOTE ON THE SMITH–WILSON INTEREST RATE CURVE

2016 ◽  
Vol 19 (07) ◽  
pp. 1650039 ◽  
Author(s):  
FLORIAN GACH
Keyword(s):  
Interest Rate ◽  
Reproducing Kernel ◽  
Reproducing Kernel Hilbert Space ◽  
Balance Sheet ◽  
Solvency Ii ◽  
Rate Curve ◽  
Insurance Companies ◽  
Substantial Part ◽  
Rigorous Framework ◽  
European Insurance

Since the entry into force of Solvency II as of 1 January 2016, all European insurance companies concerned have to use the Smith–Wilson interest rate curve to determine the value of their insurance obligations and thus of a substantial part of their balance sheet. Although Smith & Wilson introduce the underlying discount curve [Formula: see text] as the sum of a ‘long-term’ discount curve [Formula: see text] and a linear combination of the so-called Wilson function [Formula: see text] evaluated at different payment dates [Formula: see text], that is, [Formula: see text] a mathematically sound derivation of its shape is missing in the literature. The aim of this paper is to close this gap. To this end, we reformulate the infinite-dimensional optimization problem stated in Smith & Wilson (2000) within an analytically rigorous framework. We prove that it has a unique minimizer and explicitly derive the formula displayed above. In doing so, we show that [Formula: see text] is in fact the kernel function of a particular reproducing kernel Hilbert space, which is the key result to fully understanding the shape of [Formula: see text].

scholarly journals Financial management of insurance companies in the context of the new regime Solvency II

2017 ◽  
Vol 11 (1) ◽  
pp. 625-636 ◽  
Author(s):  
Costin Istrate ◽  
Dumitru Badea
Keyword(s):  
Financial Management ◽  
Solvency Ii ◽  
Capital Requirements ◽  
Insurance Companies ◽  
The European Union ◽  
Additional Information ◽  
European Area ◽  
Challenges And Opportunities ◽  
Insurance Rates ◽  
European Insurance

Abstract The new solvency regime Solvency II represents a solid and harmonized prudential framework applicable by insurance companies in the European area. Solvency II was implemented in the European Union by adopting Directives 2009/138/EC respectively 2014/51/EU, replacing existing directives regulating solvency former regime, known as Solvency I. Thus, the new European legislation in insurance, applicable from 1 January 2016, was aimed at unifying the main European insurance market and ensuring consumer protection. The responsible authority at EU level with the implementation of the new solvency regime is EIOPA - European Insurance and Occupational Pensions Authority, which dealt in previous periods of testing the European market insurance through organizing quantitative impact studies (last exercise - QIS5, organized in 2011). The main standards derived from Solvency II and also the new IFRS accounting provisions, intended to increase the transparency of risk management and investment, in order to pricing insurance products and profitability of the different classes of insurance rates. Solvency II brings both challenges and opportunities for companies, changing the concept of building protection programs for insured and generating additional concerns about capital requirements in the determination of own funds (basic, auxiliary and surplus) that can be used to meet this requirement. Also estimate realistic and prudent risk assumed by insurance contracts concluded transposed to the insurance companies by recording every technical reserves represent a very important element in order to establish an optimal balance of financial resources. Given the significant overlap between IFRS and Solvency II, insurers will have to improve disclosure requirements of additional information and adjust planning and forecasting. All these measures will increase the efficiency of financial management, a series of operational measures and by providing documented and tested processes. Also, increasing volatility related to financial results will cause insurance companies to deliver predictable results, a process that will produce changes in the financial management optics.

Comparative analysis of interest rate term structures in the Solvency II environment

2021 ◽  
Vol ahead-of-print (ahead-of-print) ◽  
Author(s):  
Mariano Gonzalez Sanchez ◽  
Sonia Rodriguez-Sanchez
Keyword(s):  
Interest Rate ◽  
Solvency Ii ◽  
Rate Curve ◽  
Insurance Companies ◽  
Occupational Pension ◽  
The European Union ◽  
Government Bonds ◽  
Content Type ◽  
Arbitrage Opportunities ◽  
European Insurance

Purpose Solvency-II is the current regulatory framework of insurance companies in the European Union. Under this standard, European Insurance and Occupational Pension Authority (EIOPA), as a regulatory board, has established that the Smith–Wilson (SW) model can be used as the model to estimate interest rate curve. This paper aims to analyze whether this model adjusts to the market curve better than Nelson–Siegel (NS) and whether the values set for the parameters are adequate. Design/methodology/approach This empirical study analyzes whether the SW interest rate curve shows lower root mean squared errors than the NS curve for a sample of daily prices of Spanish Government bonds between 2014 and 2019. Findings The results indicate that NS adjusts the market data better, the parameters recommended by the EIOPA correspond to the maximum values observed in the sample period and the current recommended curve for insurance companies underestimates company operations. Originality/value This paper verifies that the criterion of the last liquid point does not allow for selecting an optimal sample to adjust the curve and criteria based on prices without arbitrage opportunities are more appropriate.

scholarly journals Estimating the Volatility of Non-Life Premium Risk Under Solvency II: Discussion of Danish Fire Insurance Data

Risks ◽  
2020 ◽  
Vol 8 (3) ◽  
pp. 74
Author(s):  
Rocco Roberto Cerchiara ◽  
Francesco Acri
Keyword(s):  
Empirical Model ◽  
Real Data ◽  
Solvency Ii ◽  
Insurance Companies ◽  
Standard Formula ◽  
Fire Insurance ◽  
Random Threshold ◽  
Composite Models ◽  
Insurance Data ◽  
Premium Risk

We studied the volatility assumption of non-life premium risk under the Solvency II Standard Formula and developed an empirical model on real data, the Danish fire insurance data. Our empirical model accomplishes two things. Primarily, compared to the present literature, this paper innovates the fitting of Danish fire insurance data using a composite model with a random threshold. Secondly we prove, by fitting the Danish fire insurance data, that for large insurance companies the volatility of the standard formula is higher than the volatility estimated with internal models such as composite models, also taking into account the dependence between attritional and large claims.

scholarly journals Internal model for insurers: possibilities and issues

2019 ◽  
Author(s):  
Ilze Zariņa ◽  
Irina Voronova ◽  
Gaida Pettere
Keyword(s):  
Risk Management ◽  
Literature Review ◽  
Life Insurance ◽  
Internal Model ◽  
Solvency Ii ◽  
Insurance Companies ◽  
Management Tool ◽  
Standard Formula ◽  
Risk Aggregation ◽  
The Baltic

Purpose – solvency II framework regulates how much capital the European Union insurance companies must hold. The amount of necessary capital can be calculated using a standard formula or an internal model. On the basis of the review of other authors’ empirical research, the present paper aim at identifying factors that influence necessary capital and propos-ing necessary areas of improvement for the methodology of an internal capital model. Research methodology – to conduct the paper, the authors have used the extended literature review. Analytical methods and comparative methods have been used for the Baltic non-life insurance market analysis. Findings – the Baltic market does not use an internal model even for a major risk – premium and reserve risks. A review of the current literature findings shows that the main weakness of the standard formula is risk aggregation. Research limitations – identified factors apply to non-life insurance companies under the Solvency II framework with a focus on reserve risk. Practical implications – factors are identified that should be implemented in the internal model methodology. The paper will help avoid using internal models as only a modern risk management tool and improve risk profile accuracy. Originality/Value – improvements of the internal model methodology are proposed based on a literature review. The au-thors have identified the main directions, issues and improvement possibilities for reaching modern risk management.

scholarly journals Европска регулатива тржишта осигурања – изазови имплементације у Црној Гори // European regulation of insurance market – challenges of the implementation in Montenegro

2013 ◽  
Vol 11 (18) ◽  
pp. 169
Author(s):  
Милијана Нововић ◽  
Милан Лакићевић
Keyword(s):  
Financial Stability ◽  
International Association ◽  
Solvency Ii ◽  
Positive Influence ◽  
Internal Controls ◽  
Insurance Market ◽  
Insurance Companies ◽  
Insurance Supervision ◽  
The Stability ◽  
European Insurance

Резиме: Тржишна позиција и конкурентска предност црногорских осигуравача на интегрисаном тржишту осигурања, може се одржати унапређењем професионализма, уважавањем потреба осигураника, јачањем финансијског капацитета у циљу преузимања великих ризика, увођењем софистицираних производа осигурања, као и прилагођавањем пословања конкурентској стратегији глобалног тржишта.Имплементација одредби европског законодавства за област осигурања у циљу интеграције црногорског у европско тржиште, представља велики изазов за све тржишне субјекте. Имајући у виду величину и специфичности црногорског тржишта, неопходно је креирањем нових, или измјенама постојећих законских рјешења, водити рачуна не само о прелазним роковима за усклађивање пословања са прописима Европске уније (ЕУ), већ и о одржавању стабилности тржишта осигурања Црне Горе. У циљу успостављања адекватног институционалног оквира за интеграцију домаћег у јединствено европско тржиште, Агенција за надзор осигурања Црне Горе би требала да усвоји акте усклађене са директивама Европске уније и основним принципима Међународног удружења супервизора осигурања. Имплементацијом пројекта „Солвентност II”, уз проактивну и правовремену контролу пословања, осигуравајуће компаније ће морати да идентификују и вреднују све ризике којима су изложене, антиципирају тржишне промјене, јачају унутрашњу контролу и одржавају своју финансијску стабилност, што ће позитивно утицати на даљи просперитет тржишта осигурања.Summary: Market position and competitive advantage of insurers in the integrated Montenegrin insurance market, can be sustained by improving professionalism, taking into account the needs of the insured, strengthening of financial capacity with the aim that insurers accept the big risks, introducing of sophisticated insurance products, as well as by adjusting the business for competitive strategy of global market.Implementation of European insurance legislation in order to integrate Montenegrin into European insurance market is a big challenge for all insurance market subjects. Considering the size and specificity of Montenegrin insurance market, it is necessary that when creating new and changing valid legal solutions, regulator takes into account not only the deadlines for the adjustment of insurance companies’ businesses with EU regulations, but also the stability of the insurance market in Montenegro.In order to establish an adequate institutional framework for integration into the European market, the Insurance Supervision Agency of Montenegro should adopt legislation in line with European Union directives and the fundamental principles of the International Association of Insurance Supervisors. By implementing the „Solvency II” project, with a proactive and adequate control of the business, the insurance companies will have to identify and evaluate the risks they are exposed, to anticipate market changes, to improve internal controls and to maintain its financial stability. All mentioned will have the positive influence on the future prosperity of the insurance market .

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