Over the past decade, European banking and insurance regulation has been subject to significant reforms. One of the declared goals of the authorities was the enhancement of market stability through adequate and consistent capital standards. This paper provides a critical analysis of the Basel II, III, and Solvency II capital standards for asset risks in light of these regulatory objectives. Our discussion begins with a detailed overview of the current standard approaches for market and credit risk. Based on a theoretical analysis and a numerical comparison of the capital charges our contribution is twofold: we reveal an inaccurate treatment of risk categories and severe inconsistencies between the capital standards for banks and insurers. Regarding the former, we are able to show that the models’ inaccurate parameter settings do not reflect the specific risk-return characteristics of asset classes and unduly promote government bond holdings. This might lead to severe distortions to the financial institutions’ investment decisions. With respect to the latter, the numerical part of our paper displays considerable differences in required capital for the same type and amount of asset risk, burdening insurers with almost twice as high capital requirements than banks. This not only contradicts the authorities’ goal, but gives also rise to regulatory arbitrage opportunities across financial sectors.
Newly introduced government-subsidized pension products in Germany are required to contain a promise by the seller to provide a "money-back guarantee" at the end of the term. The client is also given the right to stop paying premiums at any time (paid-up option). In this case, the amount of all premiums paid must also be guaranteed by the seller at maturity, no matter when the client stopped paying the premiums. Previous analyses of guarantees in such government-subsidized pension products have ignored this additional option. Within a generalized Black/Scholes framework, we analyze the value of the paid-up option for different products, market scenarios, and client behavior. Our results indicate that the paid-up option significantly increases the value of the money-back guarantee. Furthermore, we find that reducing volatility by shifting the client's assets from stocks to bonds as maturity approaches is a suitable means of reducing the risk arising from the "pure" money-back guarantee but much less effective in reducing the risk arising from the paid-up option.
This paper provides a comprehensive analysis of efficiency and productivity in the German
property-liability insurance industry, a market that has experienced significant
change in recent years. Using data envelopment analysis (DEA) and covering the period
1995-2006, we find that there is potential for the market to improve by about 15% in
terms of technical efficiency and about 45% in terms of cost efficiency. Furthermore, total
factor productivity and efficiency growth are revealed to be low, with growth rates of
1.3% and 0.6%, respectively, for 1995-2006. A major contribution of the paper is its
analysis of six efficiency determinants-firm size, distribution channels, ownership
forms, product specialization, financial leverage, and premium growth-using a novel
truncated regression and bootstrapping approach suggested by Simar/Wilson (2007) to
avoid invalid inference.
In this paper we consider the finite element approximation of the singularities of the solution of Poisson problems in a polygonal domain with reentrant corners or changing Dirichlet-Neumann boundary conditions. We use a correction algorithm with patches of elements to improve the a priori error estimates and to obtain the same order as the optimal estimate when everything is regular. We give an application of the correction method to the problem of glacier modeling.
Ensuring future payments to policyholders is of essential importance in the insurance business model. In order to provide a high safety level, the insurance industry faces particularly severe regulations by state authorities via varying means. These come with substantial benefits and costs for all affected stakeholder groups. However, it is in itself not clear if the benefits outweigh the costs. In this paper, we focus on the introduction of the Solvency II framework as a new regulatory measure and adopt a policyholder's point of view in our economic model. In the context of Solvency II, we compare the policyholder's willingness to pay for the higher safety level (i.e., a valuation of benefits of Solvency II) with the estimated costs mentioned in the literature for the new regulatory standard. Three different models are used to assess the policyholders' willingness to pay. These are (i) a behavioural approach, (ii) an option pricing model, as well as (iii) a utility-based model. Our analyses raise doubts about whether the estimated costs of the Solvency II framework are lower than the costs policyholders are willing to pay for an increased safety level due to Solvency II.
