Return on Risk-Adjusted Capital Under Solvency II: Implications for the Asset Management of Insurance Companies

Alexander Braun (), Hato Schmeiser () and Florian Schreiber ()
Additional contact information
Alexander Braun: Institute of Insurance Economics, University of St. Gallen
Hato Schmeiser: Institute of Insurance Economics, University of St. Gallen
Florian Schreiber: Institute of Insurance Economics, University of St. Gallen

The Geneva Papers on Risk and Insurance - Issues and Practice, 2018, vol. 43, issue 3, No 4, 456-472

Abstract: Abstract We derive a European life insurer’s return on risk-adjusted capital (RORAC) under the Solvency II capital requirements. To do so, we draw on historical time series data and construct a large number of asset allocations, taking into account current portfolio shares of the German life insurance industry. Subsequently, we determine expected profits and market risk capital charges by means of the standard formula. Our results indicate that the RORAC is mainly driven by the capital requirements, while the expected profits are almost irrelevant. Moreover, we show that less-diversified portfolios with high asset risk need to be backed by low capital buffers and therefore result in high RORAC values. Well-diversified portfolios with balanced risk–return profiles, on the other hand, involve higher capital charges and thus achieve low RORAC figures. Hence, under Solvency II, a RORAC-based performance measurement may have detrimental effects for a life insurer’s stakeholders.

Keywords: asset management; solvency II; performance measurement; RORAC (search for similar items in EconPapers)
Date: 2018
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (8)

Downloads: (external link)
http://link.springer.com/10.1057/s41288-017-0076-x Abstract (text/html)
Access to full text is restricted to subscribers.

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:pal:gpprii:v:43:y:2018:i:3:d:10.1057_s41288-017-0076-x

Ordering information: This journal article can be ordered from
http://www.springer.com/finance/journal/41288/PS2

DOI: 10.1057/s41288-017-0076-x

Access Statistics for this article

The Geneva Papers on Risk and Insurance - Issues and Practice is currently edited by Christophe Courbage

More articles in The Geneva Papers on Risk and Insurance - Issues and Practice from Palgrave Macmillan, The Geneva Association Contact information at EDIRC.
Bibliographic data for series maintained by Sonal Shukla () and Springer Nature Abstracting and Indexing ().