Risk Measures and Capital Requirements: A Critique of the Solvency II Approach

Alberto Floreani ()
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Alberto Floreani: Department of Economics and Business Administration, Faculty of Banking, Finance and Insurance Sciences, Università Cattolica del Sacro Cuore, Largo Gemelli, 1, Milano 20123, Italy.

The Geneva Papers on Risk and Insurance - Issues and Practice, 2013, vol. 38, issue 2, 189-212

Abstract: In this paper the Solvency II VaR-based capital requirement is analysed and discussed. The new European risk-based system of prudential regulation for insurers could in fact increase, and not decrease, the fragility of the insurance industry. More specifically, the VaR capital requirement exposes insurance companies to a potentially huge systemic effect, as the bigger/better diversified insurers have high default probabilities in case of market shortfalls. This paper shall suggest and discuss some adjustments to the current Solvency II framework.

Date: 2013
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