IDEAS home Printed from https://ideas.repec.org/p/sol/wpaper/2013-61180.html
   My bibliography  Save this paper

Insurance Solvency Regulation: Regulatory Approaches Compared

Author

Listed:
  • Benjamin Lorent

Abstract

In this paper we compare the main regulatory frameworks: American (US RBC, Risk-Based-Capital), Swiss (SST, Swiss Solvency Test) and European (Solvency II). We improve on the existing literature by focusing on technical aspects of regulation schemes, particularly the capital requirements’ calculation and by including latest quantitative and qualitative improvements of the Solvency II project. The comparison concludes that Swiss and European systems are advanced regulatory processes in comparison with American regulation although the latter system was perceived as a revolution some years ago. Even if the Swiss regime and the future European directive are quite similar, there are also some key differences to highlight. European approach to determine regulatory capital is mainly risk-sensitive, based on risk measures, whereas US RBC is mainly based on static factors and accounting data reported in the audited statutory annual statement. The three systems also differ with regards to the use of different risk measures, the consideration of operational and catastrophe risks, the use of internal models, the treatment of diversification effect, the limits imposed to investments, and the consideration of qualitative aspects.

Suggested Citation

  • Benjamin Lorent, 2010. "Insurance Solvency Regulation: Regulatory Approaches Compared," Working Papers CEB 10-041, ULB -- Universite Libre de Bruxelles.
    • Handle: RePEc:sol:wpaper:2013/61180
    as

    Download full text from publisher

    File URL: https://dipot.ulb.ac.be/dspace/bitstream/2013/61180/1/wp10041.pdf
    File Function: wp10041
    Download Restriction: no
    ---><---

    References listed on IDEAS

    as
    1. J. David Cummins & Martin F. Grace & Richard D. Phillips, 1998. "Regulatory solvency prediction in property-liability insurance: risk-based capital, audit ratios, and cash flow simulation," Working Papers 98-20, Federal Reserve Bank of Philadelphia.
    2. Martin Eling & Denis Toplek, 2009. "Modeling and Management of Nonlinear Dependencies–Copulas in Dynamic Financial Analysis," Journal of Risk & Insurance, The American Risk and Insurance Association, vol. 76(3), pages 651-681, September.
    3. Martin Eling & Nadine Gatzert & Hato Schmeiser, 2008. "The Swiss Solvency Test and its Market Implications," The Geneva Papers on Risk and Insurance - Issues and Practice, Palgrave Macmillan;The Geneva Association, vol. 33(3), pages 418-439, July.
    4. Martin Eling & Hato Schmeiser & Joan T. Schmit, 2007. "The Solvency II Process: Overview and Critical Analysis," Risk Management and Insurance Review, American Risk and Insurance Association, vol. 10(1), pages 69-85, March.
    5. Cummins, J. David & Harrington, Scott E. & Klein, Robert, 1995. "Insolvency experience, risk-based capital, and prompt corrective action in property-liability insurance," Journal of Banking & Finance, Elsevier, vol. 19(3-4), pages 511-527, June.
    6. Bertrand Venard & David Cummins, 2007. "Handbook of international insurance. Between global dynamics and local contingencies," Post-Print hal-00778917, HAL.
    7. René Doff, 2008. "A Critical Analysis of the Solvency II Proposals," The Geneva Papers on Risk and Insurance - Issues and Practice, Palgrave Macmillan;The Geneva Association, vol. 33(2), pages 193-206, April.
    8. Philippe Artzner & Freddy Delbaen & Jean‐Marc Eber & David Heath, 1999. "Coherent Measures of Risk," Mathematical Finance, Wiley Blackwell, vol. 9(3), pages 203-228, July.
    9. Therese M. Vaughan, 2009. "The Implications of Solvency II for U.S. Insurance Regulation," NFI Policy Briefs 2009-PB-03, Indiana State University, Scott College of Business, Networks Financial Institute.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Pierre-Charles Pradier & Arnaud Chneiweiss, 2016. "The evolution of insurance regulation in the EU since 2005," Post-Print halshs-01390899, HAL.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Eling, Martin & Gatzert, Nadine & Schmeiser, Hato, 2009. "Minimum standards for investment performance: A new perspective on non-life insurer solvency," Insurance: Mathematics and Economics, Elsevier, vol. 45(1), pages 113-122, August.
    2. Dionne, Georges & Harrington, Scott, 2017. "Insurance and Insurance Markets," Working Papers 17-2, HEC Montreal, Canada Research Chair in Risk Management.
    3. Vsevolod Malinovskii, 2020. "Value-at-Risk substitute for non-ruin capital is fallacious and redundant," Papers 2005.05428, arXiv.org.
    4. Robert W. Klein, 2012. "The Modernization of Insurance Company Solvency Regulation in the U.S.: Issues and Implications," NFI Policy Briefs 2012-PB-01, Indiana State University, Scott College of Business, Networks Financial Institute.
    5. Asier Garayeta & J. Iñaki De la Peña & Eduardo Trigo, 2022. "Towards a Global Solvency Model in the Insurance Market: A Qualitative Analysis," Sustainability, MDPI, vol. 14(11), pages 1-18, May.
    6. Carson, James & Hoyt, Robert, 2000. "Evaluating the risk of life insurer insolvency: implications from the US for the European Union," Journal of Multinational Financial Management, Elsevier, vol. 10(3-4), pages 297-314, December.
    7. Choo, Weihao & de Jong, Piet, 2016. "Insights to systematic risk and diversification across a joint probability distribution," Insurance: Mathematics and Economics, Elsevier, vol. 67(C), pages 142-150.
    8. Jiang Cheng & Mary A. Weiss, 2012. "The Role of RBC, Hurricane Exposure, Bond Portfolio Duration, and Macroeconomic and Industry-wide Factors in Property–Liability Insolvency Prediction," Journal of Risk & Insurance, The American Risk and Insurance Association, vol. 79(3), pages 723-750, September.
    9. Pierre-Charles Pradier & Arnaud Chneiweiss, 2016. "The evolution of insurance regulation in the EU since 2005," Université Paris1 Panthéon-Sorbonne (Post-Print and Working Papers) halshs-01390899, HAL.
    10. Marcos Escobar & Paul Kriebel & Markus Wahl & Rudi Zagst, 2019. "Portfolio optimization under Solvency II," Annals of Operations Research, Springer, vol. 281(1), pages 193-227, October.
    11. Robert W. Klein & Shaun Wang, 2009. "Catastrophe Risk Financing in the United States and the European Union: A Comparative Analysis of Alternative Regulatory Approaches," Journal of Risk & Insurance, The American Risk and Insurance Association, vol. 76(3), pages 607-637, September.
    12. Gatzert, Nadine & Martin, Michael, 2012. "Quantifying credit and market risk under Solvency II: Standard approach versus internal model," Insurance: Mathematics and Economics, Elsevier, vol. 51(3), pages 649-666.
    13. Boonen, Tim J., 2017. "Risk Redistribution Games With Dual Utilities," ASTIN Bulletin, Cambridge University Press, vol. 47(1), pages 303-329, January.
    14. Ferro, Gustavo & Castagnolo, Fermando, 2010. "Seguros, crisis, regulación y disciplina del mercado [Insurance, crisis, regulation and market discipline]," MPRA Paper 25593, University Library of Munich, Germany, revised 01 Oct 2010.
    15. Therese M. Vaughan, 2009. "The Implications of Solvency II for U.S. Insurance Regulation," NFI Policy Briefs 2009-PB-03, Indiana State University, Scott College of Business, Networks Financial Institute.
    16. Derrick W. H. Fung & David Jou & Ai Ju Shao & Jason J. H. Yeh, 2018. "The China Risk-Oriented Solvency System: A Comparative Assessment with Other Risk-Based Supervisory Frameworks," The Geneva Papers on Risk and Insurance - Issues and Practice, Palgrave Macmillan;The Geneva Association, vol. 43(1), pages 16-36, January.
    17. Pavel Wünsch, 2017. "Own Funds Under Solvency Regime," European Financial and Accounting Journal, Prague University of Economics and Business, vol. 2017(3), pages 87-102.
    18. Berry-Stölzle, Thomas R. & Koissi, Marie-Claire & Shapiro, Arnold F., 2010. "Detecting fuzzy relationships in regression models: The case of insurer solvency surveillance in Germany," Insurance: Mathematics and Economics, Elsevier, vol. 46(3), pages 554-567, June.
    19. Therese M. Vaughan, 2008. "The Implications of Prompt Corrective Action for Insurance Firms," NFI Policy Briefs 2008-PB-02, Indiana State University, Scott College of Business, Networks Financial Institute.
    20. Eling, Martin & Pankoke, David, 2012. "Systemic Risk in the Insurance Sector – What Do We Know?," Working Papers on Finance 1222, University of St. Gallen, School of Finance.

    More about this item

    Keywords

    Solvency II; Swiss Solvency Test; US RBC; Insurance Regulation;
    All these keywords.

    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
    • K23 - Law and Economics - - Regulation and Business Law - - - Regulated Industries and Administrative Law

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:sol:wpaper:2013/61180. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Benoit Pauwels (email available below). General contact details of provider: https://edirc.repec.org/data/cebulbe.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.