Equity Solvency Capital Requirements - What Institutional Regulation Can Learn from Private Investor Regulation

Laurens Swinkels, David Blitz (), Winfried Hallerbach and Pim Vliet ()
Additional contact information
David Blitz: Robeco, Weena 850
Pim Vliet: Robeco, Weena 850

The Geneva Papers on Risk and Insurance - Issues and Practice, 2018, vol. 43, issue 4, No 4, 633-652

Abstract: Solvency II has one standard equity solvency capital requirement for type 1 or developed market stocks (39 per cent) and one for type 2 or emerging market stocks (49 per cent). As such, differences in financial economic risk of stock portfolios within developed or emerging markets do not influence solvency requirements. This encourages risk-seeking behaviour by insurance companies, and could sustain or even create structural mispricing in the cross-section of stock returns. We argue to improve Solvency II regulation by aligning it with more sophisticated European regulation that is already in place for mutual funds. Specifically, we propose to multiply the standard solvency charge of 39 per cent with the ratio of equity portfolio volatility to broad equity market volatility. This ratio will be above one for more risky portfolios and below one for less risky portfolios, meaning that high-risk stock portfolios require more solvency capital than the market, while low-risk stock portfolios require less. Our approach encompasses the existing distinction between emerging and developed markets, and reduces geography to just one of many potential sources of risk that should be recognised. The proposed approach gives better incentives to institutional investors, contributes to market efficiency, and is much less prone to regulatory arbitrage than the existing approach.

Keywords: capital requirements; equities; regulation; Solvency II (search for similar items in EconPapers)
Date: 2018
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

Downloads: (external link)
http://link.springer.com/10.1057/s41288-018-0086-3 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:4:d:10.1057_s41288-018-0086-3

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

DOI: 10.1057/s41288-018-0086-3

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 ().