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Discretionary decisions in capital requirements under Solvency II

Author

Listed:
  • Nicolaus Grochola

    (Goethe University Frankfurt)

  • Sebastian Schlütter

    (Mainz University of Applied Sciences)

Abstract

European insurers are allowed to make discretionary decisions in the calculation of Solvency II capital requirements. These choices include the design of risk models (ranging from a standard formula to a full internal model) and the use of long-term guarantees measures. This article examines the situation of insurers that utilize the discretionary scope regarding capital requirements for market risks. In a first step of our analysis, we assess the risk profiles of 49 stock insurers using daily market data. In a second step, we exploit hand-collected Solvency II data for the years 2016 to 2020. We find that long-term guarantees measures substantially influence the reported solvency ratios. The measures are chosen particularly by less solvent insurers and those with high interest rate and sovereign credit risk sensitivities. Internal models are used more frequently by large insurers and especially for market risks for which they have already found adequate immunization strategies.

Suggested Citation

  • Nicolaus Grochola & Sebastian Schlütter, 2025. "Discretionary decisions in capital requirements under Solvency II," The Geneva Papers on Risk and Insurance - Issues and Practice, Palgrave Macmillan;The Geneva Association, vol. 50(2), pages 405-443, April.
    • Handle: RePEc:pal:gpprii:v:50:y:2025:i:2:d:10.1057_s41288-024-00330-3
    DOI: 10.1057/s41288-024-00330-3
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