Solvency Standards Research Articles

INCREASING THE COMPETITIVENESS OF INSURERS AND MATCHING THE REQUIREMENTS OF INTERNATIONAL STANDARDS

In this article, it is stated that the operation of insurance companies in accordance with the standards of solvency and maintaining financial stability will increase their competitiveness and investment attractiveness and open the way to international markets. Also, the experience of developed countries regarding the implementation of the Solvency II directive on compliance with solvency standards was studied, relevant conclusions were drawn, and proposals and recommendations were developed in this regard.

ОСОБЛИВОСТІ ЗДІЙСНЕННЯ ІНВЕСТИЦІЙНОЇ ДІЯЛЬНОСТІ СТРАХОВИМИ КОМПАНІЯМИ В УКРАЇНІ

The article studies the essence and features of the investment activity of insurance companies. It was found that the investment potential of an insurer, measured as its ability to carry out investment activities, is a characteristic of the company. The main financial resources for investment by an insurance company are its own and borrowed funds. Special attention is paid to the matter that there are legislative restrictions on the investment of insurance reserves by insurers, because the unconscious use of insurance reserves belonging to a group of attracted funds of insurance companies may cause a lack of funds to cover insurance claims. The insurer may dispose of the funds raised during a certain period, the time limits of which depend on what type of insurance the company carries out – life insurance or non-life insurance. It is specified that a non-life insurer can form only short-term insurance reserves and invest them in current financial investments with high liquidity. The life insurance companies that accumulate insurance reserves for a sufficiently long period can carry out long-term investment activities. The general level of development of the insurance market in Ukraine in 2018–2022 was studied. Among the main reasons for the reduction in the number of insurance companies over this period are noted: the introduction of solvency standards in 2018, the introduction of a new regulator presented by NBU, the Covid-19 pandemic and the crisis caused by it, and the russian invasion of Ukraine. The dynamics of the main performance indicators of insurers in recent years have been considered. During the period under review, there was a drop in almost all key performance indicators of insurance companies, except for the value of assets and the volume of insurance reserves. Among the key factors that restrain the development of investment activities of insurance companies are the difficult political and economic situation in the country, imperfect legislation, outdated state regulation regarding the placement of insurance reserves, low level of capitalization of the stock market, and high investment risks, which only increase the conservatism of insurers regarding the implementation of investment processes.

Genesis and Prospects of Higher Insurance Education Development in Russia

The article discusses the history and stages of development of insurance education in Russia in comparison with the development of the insurance market in 1990–2020, determines the prospects and conditions for development of insurance education. The internal and external factors that influenced the direction and rate of the market of educational services development in the field of insurance are highlighted, the reasons for the creation and liquidation of specialized departments in Russian universities are analyzed. Based on the analysis of the Russian insurance market in 1990-2020, an understanding of the real and reported indicators of the insurance market is being formed, the differences in which caused at the first stage the creation of a significant number of insurance departments in Russian universities, not supported by a real need for specialists, and then the liquidation of the departments with the loss of the already established competencies for training insurance specialists. In the late 2010s, the modernization processes in the requirements for insurance organizations took place, the financial stability and solvency standards were being raised, mandatory actuarial valuation and new forms of financial reporting were being introduced that required specialized knowledge, basic and professional standards were being developed and adopted with the participation of self-regulatory organizations of insurers. All of that actualized the activities of specialized insurance departments based on the integration of professional requirements fixed in professional and basic standards, and educational standards, which should allow the implementation of economically successful undergraduate and master’s programs.The history of insurance departments in modern Russia may be of interest to researchers of the history of education in modern Russia, the origins and causes of the current state of the educational services market, periods of growth and decline in the number of active players. Based on the analysis of archival and current insurance development strategies, the article highlights the adopted basic and professional standards, prospects for the development of insurance departments, gives recommendations for interaction with professional participants of the insurance market. The revealed trends are also typical for other highly professional departments.

Risk pooling and solvency regulation: A policyholder's perspective

Risk pooling and solvency regulation: A policyholder's perspective

신지급여력제도(K-ICS) 도입에 따른 보험사 부채조정 방안의 법제화에 관한 연구

Recently, there is a public opinion that the insurance industry needs to diversify its liability adjustment plans with the introduction of the new Solvency Margin system (K-ICS), which is a system to evaluate the Solvency standard of insurance companies according to IFRS17, which evaluates assets and liabilities at market value. A concern for the domestic insurance industry, which is about to introduce K-ICS, is that if a debt is measured on a market value basis under a low-interest rate trend, debt will increase. If the problem of mismatch between assets and liabilities becomes larger due to an increase in liabilities, the burden of redemption by insurance companies will increase and it is expected that capital management will become difficult. Therefore insurance companies emphasize supporting the need for insurance company debt management. The systems that have been informed in Korea as insurance liability adjustment measures that are attracting attention ahead of the introduction of the new Solvency Margin system include coinsurance, insurance buy-back, and run-off. Although coinsurance has already been introduced and enforced, it is not easy to utilize the system due to the limited utilization of the system such as coinsurance costs, and the effectiveness of the system has been questioned. Next, insurance buy-back that it is not familiar with is a system in which insurance companies pay policyholders a premium for high-interest insurance products sold in the past and eliminate existing insurance policies. From the standpoint of an insurance company, there is not much profit or loss, but the risk burden, which is an immediate issue for insurance companies, is high. It is a system that can contribute to the sustainability of insurance companies. Finally, run-off refers to the transfer of all or part of an insurance contract to another company and is used for the transfer of insurance business, business sale, risk mitigation, etc. of non-core business divisions of insurance companies. This paper considers that it is necessary to diversify insurance company debt management measures for the sound management of the insurance industry at present, when the new Solvency Margin system is about to be enforced. After examining possible legislative reviewing through a comparative study, this paper suggests the legal considerations to introducing insurance company debt management.

Features of insurance risks’ classification as the basis of risk management of insurance companies in the financial crisis

Since the global financial crisis had impacted on all aspects of insurance companies' activities, it became necessary to focus on the activities of insurers and further improve the integrated risk and capital management of global and regional insurers. The purpose of the research is to analyze differences between national and European standards for risk identification in Ukrainian insurance companies, and to provide suggestions for improving the mechanism of risk insurance management. Using the method of comparative analysis and the method of content analysis of national and international solvency standards for insurance companies, the national characteristics of the types of insurance risks and the organization of the implementation of European legislation in domestic practice were determined. By the method of generalization and deduction, the key challenges for improving the effectiveness of insurance risk management in Ukrainian practice were identified. The results of the study shows the necessity to implement a unified system of insurance risk management in Ukrainian practice, which contents national and global characteristics of the functioning of insurance markets. The results of the research have significant practical implications for insurance companies and state government insurance market and can serve as a basis for improvement of theoretical principles concerning the identification of insurance risks and implementing European experience of insurance companies in national practice.

Digital financial inclusion and fiscal solvency in Uganda’s local governments: A review of regulation mediation

Fiscal solvency has become a popular phenomenon in numerous decentralizing countries in recent years. The ability to mobilize adequate revenue to fund expenditure in a given budget period, and provide public goods and services, makes fiscal solvency very pertinent, especially in local government. However, policy, practice, and research, claim that most local entities, both in the developed and developing world, rarely achieve required fiscal solvency standards. While no clear explanation of the problem abounds, digital financial inclusion dominates the ongoing debate. Besides, regulation is also considered a very crucial factor for fiscal solvency. This study examines the probable mediation effect regulation has on the digital financial inclusion-fiscal solvency relationship in local governments in Uganda, East Africa. Based on a cross-sectional research design, data were collected from 21 districts, nine municipalities, and many sub-counties in the country’s post-conflict northern regions. The data were then subjected to structural equation modeling analysis. Its findings reveal that digital financial inclusion explains changes in fiscal solvency in surveyed local governments. Moreover, regulation has an indirect influence on the digital financial inclusion-fiscal solvency formation. Findings implications to practice and theory are discussed, and future research direction is provided

ОПТИМІЗАЦІЯ КРЕДИТНОГО РИЗИКУ З ПОЗИЦІЇ ЗАХИСТУ БАНКІВСЬКОЇ УСТАНОВИ: ТЕОРЕТИЧНІ ТА ПРИКЛАДНІ ЗАСАДИ

The implementation of effective banking activities helps to maximize the profits of the banking institution, because it is due to credit operations that the main part of the profits coming to the reserve funds is formed, as well as directed to the payment of dividends to the bank's shareholders. Therefore, minimizing credit risk and solving the problem of non-performing loans are one of the key priorities in developing a banking business strategy. Credit risk is the risk that a borrower will default on its principal debt and interest on its use. Credit risk management (its minimization) is carried out by means of the following measures: credit limitation; diversification of the bank's loan portfolio; control over the use of credit and efficiency in debt collection; credit insurance; sufficient and high-quality collateral for loans; analysis of the borrower's creditworthiness. The share of non-performing loans (NPLs) in Ukraine was 48.4% at the beginning of 2020. It has remained extremely high in recent years, although it has been gradually declining since 2018. The high share of NPLs is the result of credit expansion in previous years, when borrowers 'solvency standards were low and creditors' rights were insufficiently protected. Another important reason is the practice of lending to related parties who stopped servicing loans during the crisis. Today, all non-performing loans are recognized by banks, the level of coverage of their reserves is constantly growing and is approximately 95%. Strategy formation regulation and minimization of credit risk in scale government (at the macro level) is necessary to achieve financial stability of the banking sector. The purpose of the strategy is to regulate and minimize credit risk at the bank level (at the micro level) should be in the location optimal ratio between profitability, risk and liquidity of the bank's credit operations. This article analyses the state of bank lending in Ukraine and develops a method of optimizing credit risk in terms of protecting a banking institution. The distribution of credit risk of Oschadbank JSC and the level of non-performing loans of the bank are analysed. Recommendations for the protection of a banking institution in terms of optimizing the existing credit risk are given.

Evaluation the Impact of Capital Adequacy on the Return on Equity of Islamic Banks in Gulf Cooperation Council

The purpose of this study examines the effect of the capital adequacy on the return on equity for the largest 16 Islamic banks in gulf cooperation council in terms of market value, using panel data analysis during the Period (2010-2014) and the effect the size, inflation, and GDP as a control variables, Also to explain how Islamic banks comply with international solvency standards (Basel), and the extent to which those standards with special nature of the Islamic banks and their impact on earnings of these banks. The study data collected from published annual reports for banks The capital adequacy is the main tool to measure the bank’s ability to meet its obligation and liabilities It is a one of the risk exposure scales of banks, such as credit risk, market risk, and operational risk. Islamic banks have special standards issued by the accounting and auditing organization for Islamic financial institutions (AAOIFI) and the council of Islamic financial services board (IFSB). The study found that there is a significant relationship between capital adequacy and return on equity in the absence and in the presence of control variables and the relationship was negative, size has a statistically significant positive effect on the return on equity, inflation has a statistically significant negative effect on the return on equity, GDP has a statistically significant positive effect on the return on equity.

Revisiting Legal Capital

This paper argues for the UK to revisit the legal capital (maintenance of capital) doctrine. Leaving the EU could present an opportunity but to reform legal capital just because Brexit may make it possible to do so would have little merit. Three more substantial reasons for revisiting legal capital are developed: the evidence against legal capital being an effective bulwark against short termist corporate behaviour has continued to stack up; difficulties associated with applying legal rules on distributions in the context of modern financial reporting requirements have persisted; and we have a clearer sense of how creditors’ interests are affected by moving away from legal capital to solvency standards. The paper locates the need to revisit legal capital within the broader agenda for a system of effective corporate governance and regulation that supports economically worthwhile and sustainable business activity.

Revisiting Legal Capital

This paper argues for the UK to revisit the legal capital (maintenance of capital) doctrine. Leaving the EU could present an opportunity but to reform legal capital just because Brexit may make it possible to do so would have little merit. Three more substantial reasons for revisiting legal capital are developed: the evidence against legal capital being an effective bulwark against short termist corporate behaviour has continued to stack up; difficulties associated with applying legal rules on distributions in the context of modern financial reporting requirements have persisted; and we have a clearer sense of how creditors’ interests are affected by moving away from legal capital to solvency standards. The paper locates the need to revisit legal capital within the broader agenda for a system of effective corporate governance and regulation that supports economically worthwhile and sustainable business activity.

ПРОБЛЕМНІ ПИТАННЯ ФУНКЦІОНУВАННЯ СТРАХОВОГО РИНКУ УКРАЇНИ ТА ОСОБЛИВОСТЕЙ ЙОГО ПРУДЕНЦІЙНОГО РЕГУЛЮВАННЯ

Urgency of the research. The Ukraine insurance market shows a decrease in the dynamics of development, so the search for the latest forms and methods to stimulate the efficiency of domestic insurance companies is important and timely. A comprehensive analysis of the performance of insurers of Ukraine is necessary to develop proposals to improve the efficiency of the insurance market. Target setting. In recent years, the development of the national insurance market has been characterized by a number of destabilizing factors: economic and political instability, declining effective demand for insurance services, low public confidence, expectations of a financial crisis in the country and the world. Thus, the study of the main trends in the insurance market and the problems of its prudential regulation is of great practical importance. Actual scientific researches and issues analysis. Theoretical and applied aspects of the insurance market are represented by scientific works of such famous scientists as L. Alekseenko, V. Bazylevych, K. Bazylevych, V. Vyhovska, K. Vobly, O. Gamankova, O. Zhuravka, A. Yermoshenko, O. Kozmenko, V. S. Osadets, N. Tkachenko, V. Furman, V. Shakhov, T. Yavorska, etc. Uninvestigated parts of general matters defining. Systematic research is needed to ensure effective prudential regulation as an effective mechanism for influencing the performance of insurance companies. The research objective. Analysis of the state of the Ukraine insurance market will identify the main problems that slow down its development and outline possible ways to solve them. The statement of basic materials. This article analyzes the state and trends of the Ukraine insurance market. It is established that the activity of insurance companies of the country does not meet the needs of the national economy. Conclusions. Proposals to increase the efficiency of the domestic insurance market have been developed, in particular: the need to modernize approaches to ensuring the protection of their customers through the creation of an effective system of control over compliance with solvency standards by insurance companies.

Reliability and agreement of credit ratings in the Mexican fixed-income market

Credit ratings play an important role in the fixed income market as the entire regulatory framework of this market segment is based on them and a significant part of what investors can and cannot do is dictated by ratings. Also, a number of ratings-based metrics are employed globally to estimate capital reserves, liquidity buffers, and solvency standards for many institutional investors such as insurance companies and pension funds. A critical assumption at the root of this regulatory architecture is that the credit-rating scales of the three leading agencies (Moody’s, Fitch, and Standard & Poor’s) are completely equivalent.In this study we focus on the Mexican fixed income market. We find that the ratings of all three rating agencies exhibit a very high degree of inter-rater reliability. This means that in terms of ranking a group of bonds based on creditworthiness the three rating agencies would produce very similar results.On the other hand, using a non-parametric statistic, the Wilcoxon matched-pairs test, we conclude that there are significant discrepancies among the ratings of the three agencies. This is consistent with a low level of inter-rater agreement detected. These findings challenge the suitability of credit ratings as a useful metric for regulatory purposes as they create the possibility of arbitrage.

Reliability and Agreement of Credit Ratings in the Mexican Fixed Income Market

Credit ratings play an important role in the fixed income market as the entire regulatory framework of this market segment is based on them and a significant part of what investors can and cannot do is dictated by ratings. Also, a number of ratings-based metrics are employed globally to estimate capital reserves, liquidity buffers, and solvency standards for many institutional investors such as insurance companies and pension funds. A critical assumption at the root of this regulatory architecture is that the credit-rating scales of the three leading agencies (Moody’s, Fitch, and Standard & Poor’s) are completely equivalent.In this study we focus on the Mexican fixed income market. We find that the ratings of all three rating agencies exhibit a very high degree of inter-rater reliability. This means that in terms of ranking a group of bonds based on creditworthiness the three rating agencies would produce very similar results.On the other hand, using a non-parametric statistic, the Wilcoxon matched-pairs test, we conclude that there are significant discrepancies among the ratings of the three agencies. This is consistent with a low level of inter-rater agreement detected. These findings challenge the suitability of credit ratings as a useful metric for regulatory purposes as they create the possibility of arbitrage.

Does Regulation Matter? Riskiness and Procyclicality in Pension Asset Allocation

In this paper, we investigate the relative importance of drivers to pension funds’ asset allocation choices. We specifically test if the contrast between regulatory approaches of public and private Defined Benefits (DB) pension funds in the US, Canada and the Netherlands have an impact on the riskiness and procyclicality of their asset allocation. Derived from panel data analysis of a unique database comprising of more than 800 pension funds’ detailed asset allocations, our results underscore the economic importance of regulation in the funds’ asset allocation choices, relative to institutional and individual funds’ characteristics. In particular, quantitative risk-based capital requirements, and to a lesser extent valuation and funding requirements (i.e., the choice of the liability discount rate) or the presence of quantitative investment restrictions, induce pension funds to significantly decrease their asset allocation to risky assets, especially to equities. Allocation to alternatives, which are comparatively treated quite favorably by solvency standards, is higher in the presence of risk-based capital requirements. Contrary to popular conviction that regulatory mechanisms encourage procyclical asset allocation, we find that funds subject to risk-based capital requirements were likely to be less procyclical during the last crisis – an outcome possibly tempered by temporary regulatory slackening in response to the crisis.

Bank regulatory capital and liquidity: Evidence from US and European publicly traded banks

The theory of financial intermediation highlights various channels through which capital and liquidity are interrelated. Using a simultaneous equations framework, we investigate the relationship between bank regulatory capital and bank liquidity measured from on-balance sheet positions for European and US publicly traded commercial banks. Previous research studying the determinants of bank capital buffer has neglected the role of liquidity. On the whole, we find that banks decrease their regulatory capital ratios when they face higher illiquidity as defined in the Basel III accords or when they create more liquidity as measured by Berger and Bouwman (2009). However, considering other measures of illiquidity that focus more closely on core deposits in the United States, our results show that small banks strengthen their solvency standards when they are exposed to higher illiquidity. Our empirical investigation supports the need to implement minimum liquidity ratios concomitant to capital ratios, as stressed by the Basel Committee; however, our findings also shed light on the need to further clarify how to define and measure illiquidity and also on how to regulate large banking institutions, which behave differently than smaller ones.

Liquidity or Solvency Standards for Banks? On the Beginnings of a Change in Paradigm and the Introduction of Solvency Standard s between 1850 and 1934

Liquidity or Solvency Standards for Banks? On the Beginnings of a Change in Paradigm and the Introduction of Solvency Standard s between 1850 and 1934

Bank Regulatory Capital Buffer and Liquidity: Evidence from US and European Publicly Traded Banks

The theory of financial intermediation highlights various channels through which capital and liquidity are interrelated. Using a simultaneous equations framework, we investigate the relationship between bank regulatory capital and bank liquidity measured from on-balance sheet positions for European and U.S. publicly traded commercial banks. Previous research studying the determinants of bank capital buffer has neglected the role of liquidity. On the whole, we find that banks decrease their regulatory capital ratios when they face higher illiquidity as defined in the Basel III accords or when they create more liquidity as measured by Berger and Bouwman (2009). However, considering other measures of illiquidity that focus more closely on core deposits in the United States, our results show that small banks strengthen their solvency standards when they are exposed to higher illiquidity. Our empirical investigation supports the need to implement minimum liquidity ratios concomitant to capital ratios, as stressed by the Basel Committee; however, our findings also shed light on the need to further clarify how to define and measure illiquidity and also on how to regulate large banking institutions, which behave differently than smaller ones.

Structure, Principles and Effectiveness of Insurance Regulation in the 21st Century: Insights from Canada

The 2007–2009 financial crisis resulted in failures of many large financial institutions and among the G8 countries, only Canada did not have to provide financial support to distressed financial institutions. We first examine the existing Canadian regulatory architecture in relationship to underlying principles arising from the public theory of regulation. Elements of the Canadian regulatory framework that contributed to the success of the insurance industry in weathering the crisis include the presence of a federal regulator who monitors system-wide issues also ensures consistent solvency standards; investment guidelines that encourage prudent risk-taking; and a holistic approach to insurer monitoring. A comparison of the Canadian experience with that of other jurisdictions highlights the importance of a holistic risk management approach to firm viability, especially in light of the inherent risks arising from complex group structures. A lesson from the crisis is the need for effective ex ante and ex post cross-border and holistic supervision as most distressed institutions belonged to large complex groups operating in multiple regulatory jurisdictions.

Reconciling credit correlations

The credit crisis has created a new impetus for regulators to analyse the framework for determining regulatory capital requirements, in particular the assessment of credit risk will be challenged. Confronted with a lack of default statistics it is common practice by industry practitioners to apply a financial approach, also known as Merton’s model of the firm, and we remark that the latter approach also underpins modern solvency standards such as Basel II and Solvency II.However, while Merton’s theory is an academic beauty its implementation does not make full use of available default statistics but relies on the concept of so-called asset correlations instead. We study the different estimates used for asset correlations that have been mentioned in the literature and analyse to which extent these estimates are in line with each other, with available default statistics as well as with our own findings.Our results are in line with the majority of the literature but deviate away from the results reported by some major software providers as well as the Basel II and Solvency II figures. We offer several explanations as an attempt to reconcile the differences and point to several other features that should not be overlooked when building credit portfolio models.