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How Not to Regulate Insurance Markets: The Risks and Dangers of Solvency II

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  • Avinash D. Persaud

    () (Peterson Institute for International Economics)

Abstract

Solvency II, which the European Parliament adopted in March 2014, codifies and harmonizes insurance regulations in Europe to reduce the risk of an insurer defaulting on its obligations and producing dangerous systemic side effects. The new directive tries to achieve these aims primarily by setting capital requirements for the assets of insurers and pension funds based on the annual volatility of the price of these assets. Persaud argues that these capital requirements will impose an asset allocation on life insurers and pension funds that does not serve the interests of consumers, the financial system, or the economy. The main problem with Solvency II is that the riskiness of the assets of a life insurer or pension fund with liabilities that will not materialize before 10 or sometimes 20 years is not well measured by the amount by which prices may fall during the next year. Solvency II fails to take account of the fact that institutions with different liabilities have different capacities for absorbing different risks and that it is the exploitation of these differences that creates systemic resilience. To correct this problem, Persaud offers an alternative approach that is more attuned to the risk that a pension fund or life insurer would fail to meet its obligations when they come due and less focused on the short-term volatility of asset prices.

Suggested Citation

  • Avinash D. Persaud, 2015. "How Not to Regulate Insurance Markets: The Risks and Dangers of Solvency II," Policy Briefs PB15-5, Peterson Institute for International Economics.
  • Handle: RePEc:iie:pbrief:pb15-5
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    File URL: https://piie.com/publications/policy-briefs/how-not-regulate-insurance-markets-risks-and-dangers-solvency-ii
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    1. Avinash Persaud, 2014. "Why Bail-In Securities Are Fool's Gold," Policy Briefs PB14-23, Peterson Institute for International Economics.
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    1. Banki upadają dlatego, że nie wiedzą, iż ryzykują
      by k.Ned in Obserwator Finansowy on 2016-01-23 08:00:25

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    Cited by:

    1. Gaëtan Le Quang, 2017. ""Taking Diversity into Account": the Diversity of Financial Institutions and Accounting Regulation," EconomiX Working Papers 2017-10, University of Paris Nanterre, EconomiX.

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