New Risk‐Based Capital Standards in the European Union: A Proposal Based on Empirical Data

Abstract

In response to criticism concerning the current solvency system, the European Commission is developing new rules for insurance companies operating in the member states of the European Union (EU). Under this so-called Solvency II concept, an insurer is allowed to verify its solvency by using an internal risk management model previously approved by the regulatory authority. In this article we develop such an internal risk management approach for propertyliability insurers that is based on dynamic financial analysis (DFA). The proposed concept uses a simulation technique and models the central risk factors from the investment and underwriting areas of an insurance company. On the basis of the data provided by a German insurer, the ruin probabilities under different scenarios and varying planning horizons are calculated.

Minimum standards for investment performance: A new perspective on non-life insurer solvency

“…Liebwein (2006) discusses some requirements for Solvency II internal risk models. Schmeiser (2004) develops an internal risk model for property-liability insurers based on dynamic financial analysis. Only a few approaches and aspects of a standard model under Solvency II have been discussed at present (see, e.g., Sandström (2006), for fundamental modeling ideas, or Schubert and Grieß-mann (2007), for the ''German'' approach).…”

Dynamic Financial Analysis: Classification, Conception, and Implementation

“…DFA allows an integrated modeling of the insurance company and its environmental factors (e.g., competition, capital market, regulation). A special form of DFA considered in Schmeiser (2004) is scenario testing. In scenario testing, the future prospects of the insurance company, especially its tendency to shortfall (e.g., measured by the ruin probability), are tested under different predetermined scenarios.…”

“…Blum et al (2001) use DFA for modeling the impact of foreign exchange risks on reinsurance decisions, whereas D'Arcy and Gorvett (2004) use DFA to determine whether there is an optimal growth rate in the property–liability insurance business. Using data from a German nonlife insurance company, Schmeiser (2004) develops an internal risk management approach for property–liability insurers based on DFA.…”

Implications of IFRS for the European Insurance Industry—Insights From Capital Market Theory

“…European solvency regulation is currently undergoing substantial revision and reform (see, e.g., Schmeiser, 2004; Eling, Schmeiser, and Schmit, 2007). The European Union's “Solvency II” project is intended to result in new standards by the year 2010.…”