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Optimal investment strategies for insurance companies in the presence of standardised capital requirements

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  • Fischer, Katharina
  • Schlütter, Sebastian
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    Abstract

    The standard formula of the Solvency II framework employs an approximate value-at-risk approach to define risk-based capital requirements. The parameterization of the standard formula determines how much additional capital insurers need in order to back investments in risky assets. This paper investigates how the standard formula's stock risk calibration influences the equity position and investment strategy of a shareholder-value-maximising insurance company. Intuitively, a higher stock risk parameter should reduce the insurer's risky investments as well as his insolvency risk. However, by considering the insurer's equity level as an endogenous variable, we identify situations in which a stricter stock risk calibration leads to a significant reduction of stock investments, but leaves the actual solvency level virtually unaffected, since the insurer also lowers his equity capital position. While previous articles only deal with the statistical accuracy of the standard formula's calibration, our results shed light on the incentives resulting from different calibrations. --

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    Bibliographic Info

    Paper provided by International Center for Insurance Regulation (ICIR), Goethe University Frankfurt in its series ICIR Working Paper Series with number 09/12.

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    Date of creation: 2012
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    Handle: RePEc:zbw:icirwp:0912

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    Related research

    Keywords: solvency regulation; capital requirements; asset allocation; insurer default risk;

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    1. Kochanski, Michael, 2010. "Solvency capital requirement for German unit-linked insurance products," German Risk and Insurance Review (GRIR), University of Cologne, Department of Risk Management and Insurance, vol. 6(2), pages 33-70.
    2. Ray Rees & Hugh Gravelle & Achim Wambach, 1999. "Regulation of Insurance Markets," The Geneva Risk and Insurance Review, Palgrave Macmillan, vol. 24(1), pages 55-68, June.
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