Solvency Regulation of Insurers: A Regulatory Failure?

Peter Zweifel

Journal of Insurance Issues, 2014, vol. 37, issue 2, 135-157

Abstract: This paper puts forth a critique of European solvency regulation of the type imposed on insurers by Solvency I and II. Insurers’ underwriting and investment divisions seek to maximize the expected risk-adjusted rate of return on capital (RA-ROC) in period 0. For them, higher solvency serves to increase demand and hence premium income but ties costly capital. Sequential decision making by insurers is tracked over three periods. In period 1, exogenous changes in expected returns and involatility occur, causing optimal adjustments of solvency in period 2. In period 3, the actual change in solvency triggers adjustments in underwriting and investment, resulting in new values of expected returns and volatility. These changes create an endogenous efficiency frontier in (µ,s)-space for the insurer. Both Solvency I and II are shown to modify the slope of this frontier, inducing senior management to opt for a higher volatility in several situations. Therefore, both types of solvency regulation can run counter their stated objective, which may also be true of Solvency III.

Date: 2014
References: Add references at CitEc
Citations: View citations in EconPapers (3)

Downloads: (external link)
http://www.insuranceissues.org/PDFs/372Z.pdf (application/pdf)

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:wri:journl:v:37:y:2014:i:2:p:135-157

Access Statistics for this article

Journal of Insurance Issues is currently edited by James Barrese

More articles in Journal of Insurance Issues from Western Risk and Insurance Association
Bibliographic data for series maintained by James Barrese ().