Risikostyring i danske pensionsog livsforsikringsselskaber i relation til solvens II

Kia Heigren Bagge

Student thesis: Master thesis


This thesis deals with solvency capital requirements in Danish pension- and life insurance companies. With Solvency II coming up soon, the interest rate guarantees provides new challenges for the companies. As a result of the financial crises that begun in 2007, the Danish Pension- and life insurance companies are now facing more capital requirements with the new Solvency II regulation. Solvency II is a review of the existing capital adequacy regime for the European pension and insurance industry. The purpose is to establish a revised set of EU-wide capital requirements and risk management standards that will replace the current solvency requirements. The current EU Solvency I regulation ignores the investment risk, and the capital requirements only depends on the size of the insurance provisions. In Denmark, the solution to the shortcomings of Solvency I, where solved by the traffic light stress test of the fair value of assets and liabilities. Solvency II regulation is also built on a stress test, but with much more severe risk scenarios. Furthermore supervisory activities, reporting and public disclosure of financial and other information are a part of the Solvency II regulation. A big challenge for the companies is that the fair value of the technical provisions is sensitive to movement in interest rates. The high interest rate guarantees gives a duration mismatch between the assets and the technical provision as it increase when the interest rates fall. This problem has been solved by lowering the level of guarantees on future benefits which will lower the value of the technical provision, and then creating a bigger buffer on solvency capital. But the challenges still remains with the existing high guarantee policy holders. Furthermore the assets of the insurance funds are often not divided between the different guarantees. This creates a conflict of interest between the company's different policy holders. When the interest rates are low the fund need to lower their risk on the asset portfolio, and this is to ensure that the company is able to meet their future obligations and the solvency requirement regulations. For the pension funds to ensure that the duration of the assets match that of the liabilities they invest in interest rate derivatives. Swaps are the most commonly used derivative, however swaptions and CMS Floors are also widely used. A new directive called Omnibus II, has come from the European Commission and is a proposal with changes to the upcoming Solvency II directive. The essence of the directive is, that it provides transitional rules for the central parts of Solvency II between 3 and 10 years. The prospect of long transition rules of up to 10 years may have the result, that Solvency II does not provide the desired positive effect.

EducationsMSc in Business Administration and Management Science, (Graduate Programme) Final Thesis
Publication date2011
Number of pages92