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Will Solvency II market risk requirements bite? The impact of Solvency II on insurers' asset allocation

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  • Höring, Dirk
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    Abstract

    The European insurance industry is among the largest institutional investors in Europe. Therefore, major reallocations in their investment portfolios due to the new risk-based economic capital requirements introduced by Solvency II would cause significant disruptions in European capital markets and corporate financing. This paper studies whether the new regulatory capital requirements for market risk are a binding constraint for European insurers by comparing the market risk capital requirements of the Solvency II standard model with the Standard & Poor's rating model for a fictitious, but representative, European-based life insurer. The results show that for a comparable level of confidence, the rating model requires 68% more capital than the standard model for the same market risks. Hence, Solvency II seems not to be a binding capital constraint for market risk and thus would not significantly influence the insurance companies' investment strategies. --

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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 11/12.

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    Date of creation: 2012
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    Handle: RePEc:zbw:icirwp:1112

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    Keywords: Solvency II; Rating; Market Risk; Capital Requirements;

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    1. Martin Eling, 2012. "What Do We Know About Market Discipline in Insurance?," Risk Management and Insurance Review, American Risk and Insurance Association, American Risk and Insurance Association, vol. 15(2), pages 185-223, 09.
    2. Martin Eling & Nadine Gatzert & Hato Schmeiser, 2008. "The Swiss Solvency Test and its Market Implications," The Geneva Papers on Risk and Insurance - Issues and Practice, Palgrave Macmillan, vol. 33(3), pages 418-439, July.
    3. Katja Hanewald & Thomas Post & Helmut Gr�ndl, 2011. "Stochastic Mortality, Macroeconomic Risks and Life Insurer Solvency," The Geneva Papers on Risk and Insurance - Issues and Practice, Palgrave Macmillan, vol. 36(3), pages 458-475, July.
    4. Kathy Petroni & Douglas Shackelford, 1996. "The Effect of Risk-Based Capital on Life Insurers' Investment Portfolios," Center for Financial Institutions Working Papers, Wharton School Center for Financial Institutions, University of Pennsylvania 96-21, Wharton School Center for Financial Institutions, University of Pennsylvania.
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