Solvency II, asset liability management, and the European bond market – theory and empirical evidence

Basse, Tobias; Friedrich, Meik

doi:10.1007/s12297-008-0041-7

Cited by 13 publications

(3 citation statements)

References 21 publications

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“…Their liabilities commonly have a duration of several decades. From an insurer’s perspective, this also results in the need to invest the insurance premiums in the long term (Basse and Friedrich, 2008). However, a long-term investment period leads to corresponding challenges in the investment policy, particularly in connection with the need to comply with these guarantees.…”

Section: Asset Allocation Process In the German Life Insurance Industrymentioning

confidence: 99%

Asset liability management and the euro crisis

Gonzalez

Kunze²,

Schwarzbach³

et al. 2017

JRF

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Purpose This paper aims to investigate the long-term relationships of long-term European Monetary Union (EMU) government bond yields. From an asset managers’ or risk managers’ perspective during the euro crisis, the relevance of sovereign credit and redenomination risk became a major issue. Furthermore, it has to be differentiated between core and non-core EMU member countries. Design/methodology/approach Methods of applied time series analysis are used to investigate EMU government bond yields and EMU government bond yield spreads for Spain, Italy, The Netherlands, Austria and Germany. Both standard unit root testing procedures and breakpoint unit root tests are used to examine cointegrating relationships and structural changes in these relationships. Findings The empirical results deliver clear evidence for structural shifts in the long-term relationship between German and the two non-core EMU countries (Italy and Spain). The timing of the breaks coincides with the timing of the euro crisis. On the contrary, the results for Austria and The Netherlands are different from the findings for the two non-core countries. Research limitations/implications One major limitation of the study is the limited availability of data regarding to the reaction of asset managers or risk managers to the euro crisis. Especially in the context of the discussion with regard to the relevant risk-free rate for investors, this strand of research is relatively new. Practical implications A deeper understanding of changes in the long-term relationship between government bond yields and the re-emergence of redenomination risk is important for asset managers and risk managers in the financial services industry. This is especially true for German life insurers. Originality/value The study provides various empirical contributions to the literature on the euro crisis and sovereign credit risk. First, previous results with regard to the structural changes in the long-term relationship between German and Spanish, German and Italian, German and Austrian as well as Germany and Dutch government bond yields are confirmed using unit root breakpoint tests. Second, investigating the autoregressive coefficient and the timing of the breaks delivers evidence that non-core countries have been more exposed to the fear of redenomination risk. Third, we raise the question which risk free interest rate is relevant for the affected countries.

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Section: Asset Allocation Process In the German Life Insurance Industrymentioning

confidence: 99%

Asset liability management and the euro crisis

Gonzalez

Kunze²,

Schwarzbach³

et al. 2017

JRF

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“…For most insurance firms the developments of Solvency II are an important topic and have taken a fixed place on the agendas of CEOs. The new framework will require more sophisticated risk management tools and changes in the management of assets and liabilities are expected (Basse and Friedrich, 2008).…”

Section: Introductionmentioning

confidence: 99%

A note on the appropriate choice of risk measures in the solvency assessment of insurance companies

Wagner

2014

The Journal of Risk Finance

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Purpose – The concept of value at risk is used in the risk-based calculation of solvency capital requirements in the Basel II/III banking regulations and in the planned Solvency II insurance regulation framework planned in the European Union. While this measure controls the ruin probability of a financial institution, the expected policyholder deficit (EPD) and expected shortfall (ES) measures, which are relevant from the customer's perspective as they value the amount of the shortfall, are not controlled at the same time. Hence, if there are variations in or changes to the asset-liability situation, financial companies may still comply with the capital requirement, while the EPD or ES reach unsatisfactory levels. This is a significant drawback to the solvency frameworks. The paper aims to discuss these issues. Design/methodology/approach – The author has developed a model framework wherein the author evaluates the relevant risk measures using the distribution-free approach of the normal power approximation. This allows the author to derive analytical approximations of the risk measures solely through the use of the first three central moments of the underlying distributions. For the case of a reference insurance company, the author calculates the required capital using the ruin probability and EPD approaches. For this, the author performs sensitivity analyses considering different asset allocations and different liability characteristics. Findings – The author concludes that only a simultaneous monitoring of the ruin probability and EPD can lead to satisfactory results guaranteeing a constant level of customer protection. For the reference firm, the author evaluates the relative changes in the capital requirement when applying the EPD approach next to the ruin probability approach. Depending on the development of the assets and liabilities, and in the cases the author illustrates, the reference company would need to provide substantial amounts of additional equity capital. Originality/value – A comparative assessment of alternative risk measures is relevant given the debate among regulators, industry representatives and academics about how adequately they are used. The author borrows the approach in parts from the work of Barth. Barth compares the ruin probability and EPD approach when discussing the RBC formulas of the US National Association of Insurance Commissioners introduced in the 1990s. The author reconsiders several of these findings and discusses them in the light of the new regulatory frameworks. More precisely, the author first performs sensitivity analyses for the risk measures using different parameter configurations. Such analyses are relevant since in practice parameter values may differ from estimates used in the model and have a significant impact on the values of the risk measures. Second, the author goes beyond a simple discussion of the outcomes for each risk measure, by deriving the firm conclusion that both the frequency and magnitude of shortfalls need to be controlled.

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“…This is especially true for life insurers that have mainly invested in bonds with rather short maturities (e.g. Basse and Friedrich 2008).…”

Section: Introductionmentioning

confidence: 99%

Dividend policy and the global financial crisis: empirical evidence from the Italian insurance industry

et al. 2010

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The financial crisis has led to controversial discussions about the capital base of the insurance industry. Dividend cuts and capital increases have been suggested to counter diminishing equity. However, some observers seem to fear that investors could interpret a reduction of dividends as a sign for future problems. The empirical evidence from the Italian insurance sector reported here does indeed indicate that dividend smoothing is a relevant economic phenomenon. Therefore, Italian insurance companies should rethink dividend policy rather carefully due to the possible negative consequences of dividend cuts.

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Solvency II, asset liability management, and the European bond market – theory and empirical evidence

Cited by 13 publications

References 21 publications

Asset liability management and the euro crisis

Asset liability management and the euro crisis

A note on the appropriate choice of risk measures in the solvency assessment of insurance companies

Dividend policy and the global financial crisis: empirical evidence from the Italian insurance industry

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