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Should the insurance industry be banking on risk escalation for solvency II?

Author

Listed:
  • Bryce, Cormac
  • Webb, Rob
  • Cheevers, Carly
  • Ring, P.
  • Clark, G.

Abstract

Basel II introduced a three pillar approach which concentrated upon new capital ratios (Pillar I), new supervisory procedures (Pillar II) and demanded better overall disclosure to ensure effective market discipline and transparency. Importantly, it introduced operational risk as a standalone area of the bank which for the first time was required to be measured, managed and capital allocated to calculated operational risks. Concurrently, Solvency II regulation in the insurance industry was also re-imagining regulations within the insurance industry and also developing operational risk measures. Given that Basel II was first published in 2004 and Solvency II was set to go live in January 2014. This paper analyses the strategic challenges of Basel II in the UK banking sector and then uses the results to inform a survey of a major UK insurance provider. We report that the effectiveness of Basel II was based around: the reliance upon people for effective decision making; the importance of good training for empowerment of staff; the importance of Board level engagement; and an individual's own world view and perceptions influenced the adoption of an organizational risk culture. We then take the findings to inform a survey utilizing structural equation modelling to analyze risk reporting and escalation in a large UK insurance company. The results indicate that attitude and uncertainty significantly affect individual's intention to escalate operational risk and that if not recognized by insurance companies and regulators will hinder the effectiveness of Solvency II implementation.

Suggested Citation

  • Bryce, Cormac & Webb, Rob & Cheevers, Carly & Ring, P. & Clark, G., 2016. "Should the insurance industry be banking on risk escalation for solvency II?," International Review of Financial Analysis, Elsevier, vol. 46(C), pages 131-139.
  • Handle: RePEc:eee:finana:v:46:y:2016:i:c:p:131-139
    DOI: 10.1016/j.irfa.2016.04.014
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    References listed on IDEAS

    as
    1. Michel Flamée & Paul Windels, 2009. "Restructuring Financial Sector Supervision: Creating a Level Playing Field," The Geneva Papers on Risk and Insurance - Issues and Practice, Palgrave Macmillan;The Geneva Association, vol. 34(1), pages 9-23, January.
    2. Andreas A. Jobst, 2007. "It's all in the data – consistent operational risk measurement and regulation," Journal of Financial Regulation and Compliance, Emerald Group Publishing, vol. 15(4), pages 423-449, November.
    3. Dominique Guegan & Bertrand K. Hassani, 2011. "Operational risk: A Basel II++ step before Basel III," Documents de travail du Centre d'Economie de la Sorbonne 11053r, Université Panthéon-Sorbonne (Paris 1), Centre d'Economie de la Sorbonne, revised Mar 2012.
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    8. Nadine Gatzert & Hannah Wesker, 2012. "A Comparative Assessment of Basel II/III and Solvency II," The Geneva Papers on Risk and Insurance - Issues and Practice, Palgrave Macmillan;The Geneva Association, vol. 37(3), pages 539-570, July.
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    More about this item

    Keywords

    Operational risk; Risk escalation; Risk regulation; Basel II; Solvency II;

    JEL classification:

    • G2 - Financial Economics - - Financial Institutions and Services
    • L1 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance
    • L2 - Industrial Organization - - Firm Objectives, Organization, and Behavior
    • L5 - Industrial Organization - - Regulation and Industrial Policy
    • N2 - Economic History - - Financial Markets and Institutions

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