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Regulating Insurance Groups: A Comparison of Risk-Based Solvency Models

Author

Listed:
  • Schmeiser, Hato

    () (Institute of Insurance Economics, University of St. Gallen)

  • Siegel, Caroline

    () (Institute of Insurance Economics, University of St. Gallen)

Abstract

Regulators are currently developing group-wide capital standards that are intended to enable the effective monitoring of insurance groups. Some jurisdictions are taking steps toward models with a focus on the groups’ consolidated balance sheets, while other models focus on the interrelations of the groups’ legal entities. This paper compares two general approaches to group-wide solvency in light of the regulatory challenges of regulatory inconsistency, risk dependencies, and risk aggregation: a consolidated approach and a legal entity approach. In order to contribute to the current discussion on the regulation and risk management for insurance groups, we support our line of reasoning by using a generalized model of Gatzert and Schmeiser (2011). Our findings show that a solely consolidated viewpoint is likely to underestimate shortfall risks in times of financial crises, whereas while a sole focus on the interrelated legal entities generally makes it possible to display different group structures it cannot control regulatory arbitrage.

Suggested Citation

  • Schmeiser, Hato & Siegel, Caroline, 2013. "Regulating Insurance Groups: A Comparison of Risk-Based Solvency Models," Journal of Financial Perspectives, EY Global FS Institute, vol. 1(2), pages 119-131.
  • Handle: RePEc:ris:jofipe:0014
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    More about this item

    Keywords

    solvency; insurance group; regulation; risk management;

    JEL classification:

    • G22 - Financial Economics - - Financial Institutions and Services - - - Insurance; Insurance Companies; Actuarial Studies
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • G38 - Financial Economics - - Corporate Finance and Governance - - - Government Policy and Regulation

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