Solvency of an Insurance Undertaking

Massimiliano Maggioni and Giuseppe Turchetti
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Massimiliano Maggioni: University of Milano
Giuseppe Turchetti: Sant’Anna School of Advanced Studies

Chapter 29 in Fundamentals of the Insurance Business, 2024, pp 601-631 from Springer

Abstract: Abstract This chapter aims to describe the new approach introduced by European regulations Solvency II. This Directive defines the new criteria for the calculation of solvency margin for an insurance (and reinsurance) undertaking. The new system has three pillars. The first pillar quantifies the capital cover for meeting risks. The second pillar aims to arrange an internal organisation and the adoption of a series of behaviours consistent with a holistic view of risk management. The third pillar discloses the insurance undertaking’s operation transparently to the market. Regarding the first pillar, the reader can learn the steps required by the directive for: (1) calculation of solvency capital requirement (SCR) based on the risks foreseen by the EIOPA’s framework; (2) determination of Own Funds (OF) which are the capital available for covering the SCR; (3) calculation of solvency ratio which is the fraction between OF and SCR (this ratio must be greater than 1.0). The second pillar illustrates a system of governance based on the concept of risk management linked to governance and risk monitoring. The third pillar explains the use of information required for monitoring the actual state of solvency and financial stability overall of the insurance undertakings.

Keywords: Basel I, Basel II, Risk-oriented setting, Overall solvency system, Enterprise Risk Management (ERM), Solvency Capital Requirement (SCR), Insurance risks, Mortality risk, Longevity risk, Lapse risk, Expenses risk, Risk of revision, Underwriting risk, Pricing risk, Reserving risk, Catastrophe risk, Market risks, Loss Absorbing Capacity (LAC), Interest risks, Equity risks, Property risks, Spread risk, Currency risks, Concentration risk, Operational risk, Risk relating to intangibles, Mark-to-model, Market Value Balance Sheet (MVBS), Market Consistent Balance Sheet (MCBS), Book Value Assets (BVA), Best Estimate Liabilities (BEL), Risk Margin (RM), Standard formula, Minimum Capital Requirement (MCR), Absolute Minimum Capital Requirement (AMCR), Basic Solvency Capital Requirement (BSCR), Internal model, Undertaking-Specific Parameters (USP), Probability Distribution Function (PDF), Basic Own Funds (BoF), Own Funds (OF), Tier 1; Tier 2; Tier 3, Solvency ratio (Cover ratio), Own Risk and Solvency Assessment (ORSA), Forward Looking Assessment of Own Risks (FLAOR), Solvency and Financial Condition Report (SFCR), Regular Supervisory Reporting (RSR), Quantitative Reporting Templates (QRT) (search for similar items in EconPapers)
Date: 2024
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DOI: 10.1007/978-3-319-52851-9_29

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