During the last decade, the financial industry has faced several financial crises. Insurance supervisors have reacted by revising the existing regulatory frameworks as well as developing and implementing new solvency models. The economic research of the challenges to the insurance industry arising from these new regulatory systems is therefore an important and contemporary task. This doctoral thesis, which comprises four research papers, seeks to gain new insights into the field of regulation and the solvency assessment of insurance companies.
The first paper "The Impact of Private Equity on a Life Insurer's Capital Charges under Solvency II and the Swiss Solvency Test" is an empirical analysis of the performance of the asset class private equity regarding both its risk-return profile and its impact on an insurer's capital requirements under the Solvency II framework of the European Union as well as Switzerland's Solvency Test. We review the standard market risk models and also propose an approach for an internal model. We show that although the risk-return profile of private equity suggests a solid performance in relation to various other asset classes, the standard approaches of Solvency II and the Swiss Solvency Test overly penalize the asset class in terms of capital requirements.
The following two research papers pertain to the area of solvency assessment for insurance groups.
The paper "Solvency Assessment for Insurance Groups in the United States and Europe - a Comparison of Regulatory Frameworks" is an overview and comparison of three innovative group solvency frameworks: the National Association of Insurance Commissioners approach of the United States, the group structure model of Switzerland, and the Solvency II proposal on group solvency assessment. This comparison is based on the recently established criteria for a thorough group solvency approach of the International Association of Insurance Supervisors' Issues Paper on Group-Wide Solvency Assessment and Supervision (see IAIS, 2009b). Our analysis reveals a superiority of the European frameworks over the U.S. approach. In particular, the Swiss model is able to satisfy most of the reference criteria in full.
The third part of the dissertation contains the paper "Regulating Insurance Groups: a Comparison of Risk-Based Solvency Models". Here, two general classes of group solvency approaches are displayed and compared: the class of legal entity approaches and the class of consolidated approaches. Regarding the challenges of regulatory inconsistency and risk interdependencies, we conduct a theoretical as well as numerical analysis studying shortfall risks and capital requirements under both approaches. Our findings show that a pure consolidated focus is likely to underestimate shortfall risks in times of financial crises, whereas an approach relying on the legal entity viewpoint generally makes it possible to display different group structures but cannot control regulatory arbitrage.
Finally, the last research paper of this dissertation is called "Model Uncertainty and Its Impact on Solvency Measurement in Property-Liability Insurance". It constitutes a study of the model risk immanent in solvency models for property-liability insurers. Based on a basic framework, we analyze the effects of including stochastic jumps, linear, and nonlinear dependencies in a solvency model on shortfall risks as well as the Solvency II capital charges. In addition, we take a regulatory viewpoint, examining the possibility of reducing the deviations in risk measures - that are due to the different model specifications - by requiring interim financial reports. Our simulation results suggest that the sensitivity of capital charges as a risk measure are likely to underestimate the actual model risk to which policyholders are exposed to. Furthermore, we find that mandatory interim reports are able to significantly reduce model uncertainty.
To sum up, the standard approaches of U.S. and European solvency frameworks need additional reforms. Further development of the standard solvency models may be necessary in terms of assessing nonlinear risk dependencies, harmonizing the national capital requirements, and reducing model uncertainty. Although, from an academic perspective, the European frameworks seem superior to the current U.S. approach, they might need to partially reconsider their implicit incentive scheme. In this context, the thesis uncovers an inappropriate treatment of alternative investments in terms of capital charges under the standard market risk models of the SST and Solvency II. This can have severe economic implications such as an underrepresentation of certain asset classes that could otherwise be well suited for diversifying an insurer's asset portfolio.
