Insurance Companies are of great importance to financial stability, which is why they must be regulated to prevent bankruptcy within the financial sector. The regulation should target all major risk types concerning the insurance company and set a standard for the amount of reserve capital required, the solvency margin. Solvency II is a new set of insurance regulation that sets a common standard in insurance regulation within the European Union. How this regulation is designed is therefore of great importance to the insurance companies, the policyholders and the Economy. The purpose of this thesis is therefore to explain why it is important to have strict regulation for the insurance sector, how Solvency II is designed and covers specific risk types and whether Solvency II does improve financial stability. This is done theoretical by assessing the proposed solvency II legislation with a number of different criteria used as reference for how to optimal regulate the insurance sector. Supervision should aim to minimize costs of insurance insolvencies rather than limit the number of insolvencies. Solvency II is often compared to the Basel accords for banks, therefore in this study the Solvency II regulation and the Basel accord is compared. The finding of this study indicates that Solvency II does improve the financial stability, and does work as intended. Even though there are a number of challenges both for the insurance companies and for the supervision. The capital formula in Solvency II is calibrated by using VaR which does not take the potential impact of the insolvency cost into consideration. The big advantage of the Solvency II structure is the use of the 3 pillar approach; with pillar 2 and pillar 3 to complement the risk based capital formulas. This gives the supervision opportunities to react fast, if a company is in a critical financial situation. Pillar 2 and 3 allso insure that the companies address all their major risk types and also focus on improving internal controls and risk management processes. Solvency II does not lead to excessive capital requirement for the insurance companies, which means the financial stability, is not threatened by the regulation.
|MSc in Business Administration and Management Science, (Graduate Programme) Final Thesis
|Number of pages