scholarly journals Systemic Risk and Insurance Regulation †

Risks ◽  
2018 ◽  
Vol 6 (3) ◽  
pp. 74 ◽  
Author(s):  
Fabiana Gómez ◽  
Jorge Ponce
Keyword(s):  
Systemic Risk ◽  
Formal Model ◽  
Public Support ◽  
Solvency Ii ◽  
Capital Requirements ◽  
Insurance Companies ◽  
Prudential Regulation ◽  
High Exposure ◽  
Insurance Firms ◽  
Low Exposure

This paper provides a rationale for the macro-prudential regulation of insurance companies, where capital requirements increase in their contribution to systemic risk. In the absence of systemic risk, the formal model in this paper predicts that optimal regulation may be implemented by capital regulation (similar to that observed in practice, e.g., Solvency II ) and by actuarially fair technical reserve. However, these instruments are not sufficient when insurance companies are exposed to systemic risk: prudential regulation should also add a systemic component to capital requirements that is non-decreasing in the firm’s exposure to systemic risk. Implementing the optimal policy implies separating insurance firms into two categories according to their exposure to systemic risk: those with relatively low exposure should be eligible for bailouts, while those with high exposure should not benefit from public support if a systemic event occurs.

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 TONUITY: A NOVEL INDIVIDUAL-ORIENTED RETIREMENT PLAN

2018 ◽  
Vol 49 (1) ◽  
pp. 5-30 ◽  
Author(s):  
An Chen ◽  
Peter Hieber ◽  
Jakob K. Klein
Keyword(s):  
Risk Aversion ◽  
Switching Time ◽  
Extreme Case ◽  
Solvency Ii ◽  
Capital Requirements ◽  
Insurance Companies ◽  
Longevity Risk ◽  
Insurance Company ◽  
Risk Capital ◽  
Medium Risk

AbstractFor insurance companies in Europe, the introduction of Solvency II leads to a tightening of rules for solvency capital provision. In life insurance, this especially affects retirement products that contain a significant portion of longevity risk (e.g., conventional annuities). Insurance companies might react by price increases for those products, and, at the same time, might think of alternatives that shift longevity risk (at least partially) to policyholders. In the extreme case, this leads to so-called tontine products where the insurance company’s role is merely administrative and longevity risk is shared within a pool of policyholders. From the policyholder’s viewpoint, such products are, however, not desirable as they lead to a high uncertainty of retirement income at old ages. In this article, we alternatively suggest a so-called tonuity that combines the appealing features of tontine and conventional annuity. Until some fixed age (the switching time), a tonuity’s payoff is tontine-like, afterwards the policyholder receives a secure payment of a (deferred) annuity. A tonuity is attractive for both the retiree (who benefits from a secure income at old ages) and the insurance company (whose capital requirements are reduced compared to conventional annuities). The tonuity is a possibility to offer tailor-made retirement products: using risk capital charges linked to Solvency II, we show that retirees with very low or very high risk aversion prefer a tontine or conventional annuity, respectively. Retirees with medium risk aversion, however, prefer a tonuity. In a utility-based framework, we therefore determine the optimal tonuity characterized by the critical switching time that maximizes the policyholder’s lifetime utility.

scholarly journals The impact of lending on bancassurance activity

2019 ◽  
Vol 13 (1) ◽  
pp. 171-181
Author(s):  
Elda Marzai Abliz
Keyword(s):  
Negative Impact ◽  
Distribution Channel ◽  
Solvency Ii ◽  
Capital Requirements ◽  
Financial Supervision ◽  
Insurance Companies ◽  
Insurance Company ◽  
Customer Base ◽  
Premium Income ◽  
The Impact

Abstract Due to financial crisis, and especially because of prudence in lending (retail, micro, and corporate), banks are looking for new sources of income, and bancasurance is clearly a potential source of revenue. Thus, in the financial market, the interests of two major components of it are met: banks maximize commission income, and insurers make access to the large customer base of banks. Bancassurance is a distribution channel of insurance products through bank branches, bringing important advantages for banks, insurance companies and customers. The main advantage for the bank is that earns fee amount from the insurance company, the insurance company increases customers data base and market share, the client satisfy his financial needs and requests in the same institution. Considering that in Romania, banks and insurers do not provide information on the number of insurances sold via the bancassurance distribution channel, as well as commissions obtained by banks for the insurance sale, to determine the development of bancassurance in Romania, we used the statistical data provided by the National Bank of Romania, on credit growth and data provided by The Financial Supervision Association, on the evolution of gross written premiums. Bancassurance is one of the most important insurance distribution channels, accounting for approximately 36% of the global insurance market, in 2016, Europe’s insurers generated total premium income of €1 189bn and had €10 112bn invested in the economy. Regarding to the risks of bancassurance business for banks and insurers, they mainly concern distinct capital requirements for the banking and insurance systems, which will be covered by the Basel III and Solvency II directives. This paper aims to analyze the influence of credit on the bancassurance activity in the last 5 years in Romania, the economic, political and legal factors that have a negative impact on the development of bancassurance, and also the calculating the correlation coefficient r (Pearson’s coefficient) and his result.

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 Finite-Horizon Ruin Probabilities in a Risk-Switching Sparre Andersen Model

2018 ◽  
Vol 22 (4) ◽  
pp. 1493-1506 ◽  
Author(s):  
Lesław Gajek ◽  
Marcin Rudź
Keyword(s):  
Wait Time ◽  
Solvency Ii ◽  
Capital Requirements ◽  
Finite Horizon ◽  
Insurance Companies ◽  
Upper And Lower Bounds ◽  
Ruin Probabilities ◽  
Risk Models ◽  
Sparre Andersen Model ◽  
Andersen Model

AbstractAfter implementation of Solvency II, insurance companies can use internal risk models. In this paper, we show how to calculate finite-horizon ruin probabilities and prove for them new upper and lower bounds in a risk-switching Sparre Andersen model. Due to its flexibility, the model can be helpful for calculating some regulatory capital requirements. The model generalizes several discrete time- as well as continuous time risk models. A Markov chain is used as a ‘switch’ changing the amount and/or respective wait time distributions of claims while the insurer can adapt the premiums in response. The envelopes of generalized moment generating functions are applied to bound insurer’s ruin probabilities.

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.

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.

scholarly journals A review of Solvency II: Has it met its objectives?

2018 ◽  
Vol 23 ◽  
Author(s):  
R. A. Rae ◽  
A. Barrett ◽  
D. Brooks ◽  
M. A. Chotai ◽  
A. J. Pelkiewicz ◽  
...  
Keyword(s):  
Risk Management ◽  
Financial Stability ◽  
Working Party ◽  
Solvency Ii ◽  
Capital Requirements ◽  
Insurance Companies ◽  
Original Design ◽  
Risk Margin ◽  
The Impact ◽  
Market Consistency

AbstractSolvency II is currently one of the most sophisticated insurance regulatory regimes in the world. It is built around the principles of market consistency and embedding strong risk management and governance within insurance companies. For business with long-term guarantees, the original basis produced outcomes that were unacceptable to the member states. The original design was amended through Omnibus II. The working party has looked back at the outcome of the final regulation and comments on how well Solvency II has fared, principally from a UK perspective, relative to its initial goals of improved consumer protection, harmonisation, effective risk management and financial stability. We review Pillar 1’s market consistent valuation (including the risk margin and transitional measures) as well as the capital requirements (including internal models). We look at the impact this has on asset and liability management, pro-cyclicality and product design. We look at Pillars 2 and 3 in respect of the Own Risk and Solvency Assessment, liquidity and disclosure. Finally, we stand back and look at harmonisation and the implications of Brexit. In summary we conclude that Solvency II represents a huge improvement over Solvency I although it has not fully achieved the goals it aspired to. There are acknowledged shortfalls and imperfections where adjustments to Solvency II are likely. There remain other concerns around pro-cyclicality, and the appropriateness of market consistency is still open to criticism. It is hoped that the paper and the discussion that goes with it provide an insight into where Solvency II has taken European Insurance regulation and the directions in which it could evolve.

Prudential bank regulation: a post-Keynesian perspective

2020 ◽  
Vol 17 (3) ◽  
pp. 399-412
Author(s):  
Peter Docherty
Keyword(s):  
Systemic Risk ◽  
Conventional Treatment ◽  
Bank Regulation ◽  
Capital Requirements ◽  
Significant Modification ◽  
Prudential Regulation ◽  
Keynesian Theory ◽  
Endogenous Money ◽  
The Way

Banks play an important role in the post-Keynesian theory of endogenous money but post-Keynesians have not paid much attention to the prudential regulation of banks. Do post-Keynesian insights into the role of banks cast any light on the way they ought to be regulated, or can the conventional treatment of prudential bank regulation be grafted onto post-Keynesian theory without any significant modification? This paper begins a process of reflection on these questions. It argues that conventional prudential regulation theory can be utilised by post-Keynesians but with important modifications including a renewed emphasis on liquidity and greater recognition of endogenously generated systemic risk. A post-Keynesian approach to prudential bank regulation is shown to be characterised by both liquidity and capital requirements, as well as by a macroprudential framework that facilitates the counter-cyclical adjustment of these requirements in response to endogenous variations in systemic risk.

scholarly journals Systemic Importance of Insurance Companies—An Empirical Analysis

2016 ◽  
Vol 3 (1) ◽  
pp. 44
Author(s):  
Anushri Bansal
Keyword(s):  
Real Estate ◽  
Systemic Risk ◽  
Insurance Industry ◽  
Insurance Companies ◽  
Economic Sectors ◽  
Systemic Risks ◽  
Macroeconomic Impact ◽  
Insurance Firms ◽  
Systemic Problems ◽  
Over Time

Insurance companies are increasingly being regulated under the assumption that, like banks, they pose systemic risk to the overall economy and especially the financial system. This analysis investigates this premise by comparing the systemic importance of insurance companies and the insurance industry with that of banks, brokers, real estate firms, and their respective industries. Empirical results suggest that intra-industry linkages exist among insurance firms, although they are comparatively weaker than those in banking and real estate. Moreover, systemic risks arising from the effects of distress in other economic sectors are lower for insurance companies—although not negligible. Given its size, systemic problems arising over time from the insurance industry would have a very disruptive macroeconomic impact.

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