Abstract

AbstractThe intellectual climate around financial solvency regulation has changed markedly since the global financial crisis, especially with regard to the usefulness of market prices, the desirability of principle-based solvency assessment, the feasibility of a probabilistic approach to produce accurate capital estimates, and indeed whether solvency assessment should be risk-sensitive at all. This short paper provides some reflective notes on approaches to solvency capital assessment for insurance firms in this context.

Highlights

  • Following its extraordinary gestation period, the introduction of Solvency II across the European Union at the start of 2016 might have reasonably been expected to mark the start of a period of relative tranquillity in the formulation of regulatory capital assessment for insurance firms. Experience since suggests such an expectation may be ill-founded: it seems quite likely that the regulatory solvency regime for insurance firms in the EU, and in the United Kingdom in particular, is likely to continue to significantly evolve in the coming years

  • There are a few reasons for anticipating significant ongoing change: the economic environment continues to be exceptionally challenging for long-term liability books in northern Continental Europe in particular, and the resulting tensions between policyholder security, macro-stability and political expediency may continue to drive adjustments to the Solvency II system in ways that are difficult to predict; Solvency II represents a complex and fundamental change in approach to solvency regulation for many EU countries and so some refinement in the light of early experience is natural; and, for the United Kingdom in particular, its impending exit from the EU in the coming years potentially raises the entirely unexpected prospect of the approach to regulatory solvency assessment of UK financial institutions being re-written on a blank piece of paper

  • The zeitgeist of 2020 may be quite different to 2000 with regard to how insurance industry leaders, academics and regulators articulate an ideal regulatory solvency capital assessment framework for insurance firms and other financial institutions. This short paper provides some reflective notes on approaches to solvency capital assessment for insurance firms given this context

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Summary

Introduction

Following its extraordinary gestation period, the introduction of Solvency II across the European Union at the start of 2016 might have reasonably been expected to mark the start of a period of relative tranquillity in the formulation of regulatory capital assessment for insurance firms. The zeitgeist of 2020 may be quite different to 2000 with regard to how insurance industry leaders, academics and regulators articulate an ideal regulatory solvency capital assessment framework for insurance firms and other financial institutions This short paper provides some reflective notes on approaches to solvency capital assessment for insurance firms given this context. ∙ Section 3 notes and reflects on some contemporary commentary from industry thought-leaders on approaches to solvency capital assessment in today’s environment This will aim to demonstrate how the intellectual climate around financial solvency regulation has changed since the global financial crisis, especially with regard to the usefulness of market prices, the desirability of principle-based solvency assessment, the feasibility of a probabilistic approach to produce accurate capital estimates and whether solvency assessment should be risk-sensitive at all. This focusses on different forms of governance framework for principle-based capital assessment

On different quantitative frameworks for risk-sensitive capital assessment
Arguments for and against principle-based versus rules-based approaches
A Historical Perspective
Closing Thoughts
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