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Are non-risk based capital requirements for insurance companies binding?

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  • de Haan, Leo
  • Kakes, Jan

Abstract

We investigate whether insurers base their solvency margins on risk factors even when operating under a supervisory regime where minimum solvency requirements do not fully take such risk factors into account. To do this, we use a dataset of about 350 Dutch insurers from all major lines of business during the pre-Solvency II period 1995-2005. We find that the levels of insurers' actual solvency margins are related to their risk characteristics and not to regulatory solvency requirements. Consequently, the vast majority of insurers hold much more capital than required, i.e. non-risk based capital requirements generally are not binding. Requirements are found to affect solvency adjustment behaviour, though. More specifically, below-target capital ratios are raised most rapidly by those insurers whose targets are relatively close to the regulatory minimum. One implication from our results is that, because insurers already follow a risk-based approach, the transition to the new European regulatory framework, Solvency II, is likely to be smooth.

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Bibliographic Info

Article provided by Elsevier in its journal Journal of Banking & Finance.

Volume (Year): 34 (2010)
Issue (Month): 7 (July)
Pages: 1618-1627

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Handle: RePEc:eee:jbfina:v:34:y:2010:i:7:p:1618-1627

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Web page: http://www.elsevier.com/locate/jbf

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Keywords: Insurance companies Capital structure Solvency requirements;

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Cited by:
  1. Pasiouras, Fotios & Gaganis, Chrysovalantis, 2013. "Regulations and soundness of insurance firms: International evidence," Journal of Business Research, Elsevier, vol. 66(5), pages 632-642.
  2. Fier, Stephen G. & McCullough, Kathleen A. & Carson, James M., 2013. "Internal capital markets and the partial adjustment of leverage," Journal of Banking & Finance, Elsevier, vol. 37(3), pages 1029-1039.
  3. Leo de Haan & Jan Kakes, 2010. "Momentum or Contrarian Investment Strategies:Evidence from Dutch institutional investors," DNB Working Papers 242, Netherlands Central Bank, Research Department.
  4. Hakenes, Hendrik & Schnabel, Isabel, 2011. "Bank size and risk-taking under Basel II," Journal of Banking & Finance, Elsevier, vol. 35(6), pages 1436-1449, June.
  5. Selim Mankaï & Aymen Belgacem, 2013. "Interactions Between Risk-Taking, Capital, and Reinsurance for Property-Liability Insurance Firms," EconomiX Working Papers 2013-23, University of Paris West - Nanterre la Défense, EconomiX.
  6. Irene Albarrán & J. Miguel Marín & Pablo J. Alonso, 2011. "Why using a general model in Solvency II is not a good idea : an explanation from a Bayesian point of view," Statistics and Econometrics Working Papers ws113729, Universidad Carlos III, Departamento de Estadística y Econometría.

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