Solvency II reporting: How to interpret funds’ aggregate solvency capital requirement figures

Mezőfi, Balázs; Niedermayer, Andras; Niedermayer, Daniel; Süli, Balázs Márton

doi:10.1016/j.insmatheco.2017.08.003

Cited by 3 publications

(1 citation statement)

References 9 publications

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“…The formula then looks like: 21 The impact on the aggregate SCR for each (mutual fund) investment differs per insurance company, depending on their risk exposures. Mezõfi et al (2017) develop a worst-case SCR contribution framework that may be linked to mutual funds, which may facilitate screening the mutual fund universe by insurance companies. 22 For normally distributed returns, the standard deviation of returns (i.e.…”

Section: Synthetic Risk and Reward Indicator For Private Investorsmentioning

confidence: 99%

Equity Solvency Capital Requirements - What Institutional Regulation Can Learn from Private Investor Regulation

Swinkels

Blitz²,

Hallerbach³

et al. 2018

Geneva Pap Risk Insur Issues Pract

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Solvency II has one standard equity solvency capital requirement for type 1 or developed market stocks (39 per cent) and one for type 2 or emerging market stocks (49 per cent). As such, differences in financial economic risk of stock portfolios within developed or emerging markets do not influence solvency requirements. This encourages risk-seeking behaviour by insurance companies, and could sustain or even create structural mispricing in the cross-section of stock returns. We argue to improve Solvency II regulation by aligning it with more sophisticated European regulation that is already in place for mutual funds. Specifically, we propose to multiply the standard solvency charge of 39 per cent with the ratio of equity portfolio volatility to broad equity market volatility. This ratio will be above one for more risky portfolios and below one for less risky portfolios, meaning that high-risk stock portfolios require more solvency capital than the market, while low-risk stock portfolios require less. Our approach encompasses the existing distinction between emerging and developed markets, and reduces geography to just one of many potential sources of risk that should be recognised. The proposed approach gives better incentives to institutional investors, contributes to market efficiency, and is much less prone to regulatory arbitrage than the existing approach.

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Section: Synthetic Risk and Reward Indicator For Private Investorsmentioning

confidence: 99%

Equity Solvency Capital Requirements - What Institutional Regulation Can Learn from Private Investor Regulation

Swinkels

Blitz²,

Hallerbach³

et al. 2018

Geneva Pap Risk Insur Issues Pract

View full text Add to dashboard Cite

show abstract

An investigation of the Volatility Adjustment

Barucci,

Marazzina,

Rroji

2023

Decisions Econ Finan

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We use market data to reconstruct the volatility adjustment, a component of the Solvency II framework designed to mitigate the impact of market risk on insurance liabilities, of different countries on a monthly basis. Only partially in agreement with the regulation, we observe that the volatility adjustment, especially the proposed new mechanism, is not affected by credit quality, illiquidity of bonds, and investors’ risk appetite, but by turbulence in financial markets and equity market performance. We also show that the new mechanism proposed by EIOPA performs differently with respect to the one in force at the time of writing the current paper, yielding higher and smoother values and providing a relief to insurance companies on the Solvency II capital requirement front.

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Equity Solvency Capital Requirements: What Institutional Regulation Can Learn from Private Investor Regulation

Blitz¹,

Hallerbach²,

Swinkels

et al. 2018

SSRN Journal

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Solvency II reporting: How to interpret funds’ aggregate solvency capital requirement figures

Cited by 3 publications

References 9 publications

Equity Solvency Capital Requirements - What Institutional Regulation Can Learn from Private Investor Regulation

Equity Solvency Capital Requirements - What Institutional Regulation Can Learn from Private Investor Regulation

An investigation of the Volatility Adjustment

Equity Solvency Capital Requirements: What Institutional Regulation Can Learn from Private Investor Regulation

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