Solvency II - Lesson learned?

Inhaltsverzeichnis (Table of Contents)

• 1. Introduction
• 1.1 Subject and background of the study
• 1.2 Objectives of this thesis
• 1.3 Course of the analysis
• 1.4 Scope and limitations
• 2. Solvency II - A major European regulatory initiative
• 2.1 The development of Solvency II
• 2.2 The three pillar approach
• 2.3 The current second phase
• 2.4 Quantitative impact studies
• 2.5 A risk based economic system
• 2.5.1 The economic balance sheet
• 2.5.2 Overall structure of the standard formula
• 2.5.3 Measurement and assessment of risk
• 3. Treatment of investment risk under the standard formula
• 3.1 Interest rate risk
• 3.1.1 The discount rate
• 3.1.2 The illiquidity premium
• 3.2 Equity risk
• 3.2.1 Symmetric adjustment mechanism
• 3.2.2 Duration based equity dampener
• 3.3 Spread risk
• 3.3.1 Spread risk on bonds
• 3.3.2 Spread risk on structured credits
• 3.3.3 Spread risk on credit derivatives
• 3.4 Illiquidity premium risk
• 3.5 Property risk
• 3.6 Currency risk
• 3.7 Concentration risk
• 3.8 Counterparty default risk
• 3.9 Aggregation of risk modules
• 4. Potential implications caused by Solvency II
• 4.1 The beginning of an EU wide asset reallocation
• 4.1.1 The driver for solvency capital requirements
• 4.1.2 Summary of capital requirements of major asset classes
• 4.1.3 The changing investment behavior
• 4.2 The possibility of new risk due to changed market conditions
• 4.2.1 Negative feedbacks as a consequence of market consistent valuation
• 4.2.2 A new interesting investment market
• 4.2.3 Multiple additional threats for the insurers and the market
• 5. Conceptual drawbacks of Solvency II
• 5.1 Theory, reality and the model
• 5.1.1 The independence of price changes
• 5.1.2 Price changes adhere to a probability distribution
• 5.2 False confidence in Value at Risk
• 5.2.1 Underestimation of tail risk
• 5.2.2 Sub-additive
• 5.2.3 Different methodology leads to a different Value at Risk
• 5.3 Black Swans and the Big Bang
• 5.4 Reliance on credit rating agencies
• 5.4.1 The non transparent business model
• 5.4.2 No liability or regulation
• 5.4.3 Mistakes in the past

Zielsetzung und Themenschwerpunkte (Objectives and Key Themes)

This thesis aims to examine the impact of Solvency II, a major European regulatory initiative, on the insurance industry. It analyzes the potential consequences of the new regulations on investment behavior, asset allocation, and overall market stability.

• Impact of Solvency II on investment behavior
• Analysis of potential risks and opportunities arising from Solvency II
• Evaluation of the standard formula used for calculating solvency capital requirements
• Assessment of the implications of market consistent valuation for insurance companies
• Discussion of the challenges and limitations of Solvency II

Zusammenfassung der Kapitel (Chapter Summaries)

The first chapter introduces the subject and background of the study, outlining the objectives of the thesis and the scope of analysis. Chapter two provides a detailed overview of Solvency II, focusing on its development, the three-pillar approach, and the quantitative impact studies. It also delves into the risk-based economic system, highlighting key components like the economic balance sheet, the standard formula, and risk measurement methods. Chapter three explores the treatment of various investment risks under the standard formula, covering areas such as interest rate risk, equity risk, spread risk, illiquidity premium risk, property risk, currency risk, concentration risk, and counterparty default risk. Finally, it examines the aggregation of these risk modules. Chapter four analyzes the potential implications of Solvency II on the insurance industry. It discusses the driver for solvency capital requirements, summarizes capital requirements for major asset classes, and explores the changing investment behavior of insurance companies. The chapter also explores the possibility of new risks arising from altered market conditions and the negative feedbacks associated with market-consistent valuation. The final chapter examines the conceptual drawbacks of Solvency II, focusing on the disconnect between theory and reality, the limitations of the standard formula, and the reliance on credit rating agencies.

Schlüsselwörter (Keywords)

Solvency II, Insurance regulation, Investment behavior, Asset allocation, Risk management, Standard formula, Market consistent valuation, Credit rating agencies, Tail risk, Black Swans, Value at Risk.