Stability versus Volatility: Hungarian Experiences with the First Five Years of Solvency II Regarding Quantitative Elements

It has been more than five years since the introduction of the Solvency II framework (S2), which determines how insurers should operate in Europe, and this allows for a detailed analysis of Hungarian developments. The new approach in S2 that makes it similar to banking regulation, including the market-consistent valuation principles and the application of a risk-based capital requirement, has stood the test of time in recent years: the various shocks did not undermine the stability of the Hungarian sector. This was largely due to the recommendation of the central bank of Hungary (Magyar Nemzeti Bank, MNB) on holding a volatility capital buffer. This is because the robust capital position of the sector as a whole has been maintained in the context of 50-100-basis point reductions in capital adequacy levels in certain individual cases, which justifies the use of the capital buffer. The balanced capital position was also influenced by the conservative investment strategy, which resulted in one of the lowest market risk exposures in Europe, against the backdrop of huge government securities holdings, even by international standards.