Solvency: Models, Assessment and Regulation, 1st Edition (Hardback) book cover

Solvency

Models, Assessment and Regulation, 1st Edition

By Arne Sandstrom

Chapman and Hall/CRC

448 pages | 26 B/W Illus.

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Description

Until now there were no published analyses of the recent solvency work conducted in Europe, specifically the risk categories proposed by the International Actuarial Association (IAA). Answering the insurance industry's demand in the wake of the EU Solvency II project, Solvency: Models, Assessment and Regulation provides a concrete summary and review of solvency and inspires additional work in the field.

Following an introduction to the concept, the first section of the book provides a historical review of solvency, detailing solvency regulation and accounting within the EU. A review of the steps leading to Solvency II looks at accounting, supervision, the actuarial field, the first phase of Solvency II, international approaches to banking, and the solvency systems of 12 major nations.

The second section explores the current basis for solvency modeling, focusing on the valuation of assets and liabilities, dependency and various conservative approaches, as well as a baseline and benchmark approach. This section also provides examples of risk structure and the effects of diversification.

The final section discusses groups and internal modeling as it relates to EU Solvency II. It addresses insurance groups, financial conglomerates, reinsurance, the importance of internal modeling and stress testing, and the current state of the second phase of EU Solvency II.

Reviews

"… a timely and thorough historical analysis of the recent European work on solvency and financial strength and related accounting issues … The book provides readers with a veritable ‘Who’s Who’ of the numerous organizations intimately involved in the EU solvency debate … The author unquestionably succeeds, incorporating several detailed quantitative examples through a well-written and organized text. … Overall, the book offers a thorough and thoughtful discussion of the current state of evolution regarding solvency regulation, theory, and research in the EU. Policymakers, insurance academics, researchers, students, and other interested parties around the world may find this book highly relevant in understanding solvency models, formulation, assessment, and the debate over alternative strategies for reform. The book offers an objective overview of the issues that is understandable to both technical and nontechnical readers as well as important insights into identifying the key players, theory, and application across diverse and potentially unfamiliar systems."

The Journal of Risk and Insurance, December 2009

"…the first available reference to offer a comprehensive account of the recent solvency work conducted in Europe. It provides a nice and very useful summary of the recent developments in the important area of asset and liability management that have been carried out in recent years, answering the insurance industry’s demand in the wake of the EU’s Solvency II project. … This book is well written, well organized and a very rich source of useful information for decision makers in the insurance industry, practitioners of the actuarial profession and financial asset managers. Researchers in both the fields of actuarial science and financial economics may find it informative and inspiring to further research in the field of asset and liability modeling."

Scandinavian Actuarial Journal

Table of Contents

Introduction

General Outline of the Book

Organizations

A Selection of Solvency Readings

Solvency: What Is It?

In the 18th Century

What Does Solvency Mean?

PAST AND PRESENT: A HISTORICAL REVIEW AND DIFFERENT APPROACHES TO SOLVENCY

The European Union: Solvency 0 and Accounting

The Works of Campagne

Other Steps toward the First Directives

The Non-Life Directives (First, Second, and Third)

The Life Directives (First, Second, and Third)

Calculating the Solvency Margin for Non-Life Insurance

Business

The Insurance Accounting Directive (IAD)

The European Union: Solvency I

The Müller Report

Comments from Groupe Consultatif

The Solvency I Directives

Calculating the Solvency Margin for Non-Life Insurance

Business

Steps toward Solvency II:

Bank for International Settlements (BIS): The New Basel Capital

Accord

IASB: Toward a New Accounting System

IAIS: Insurance Principles and Guidelines

IAA: A Global Framework for Solvency Assessment

EU: Solvency II - Phase I

Steps toward Solvency II: 2

Australia

Canada

Denmark

Finland

The Netherlands

Singapore

Sweden

Switzerland

U.K.

U.S.

Some Other Systems

Summary of Different Systems

PRESENT: MODELING A STANDARD APPROACH

The Fundamental Ideas

A Model for the Solvency Assessment

Level of Capital Requirements

Risks and Diversification

Risk Measures

Valuations

Fair Value: Introduction

Purposes of Valuation

Best Estimate of Insurance Liability and Technical Provisions

Fair Value

Dependencies, Baseline, and Benchmark Models

Risk Measures

Assume Normality

Assume Nonnormality

Correlations between Risks: Different Levels of Conservatism

Parameters in a Factor-Based Model

One Example of Risk Categories and

Diversification

Insurance Risk

Market Risk

Credit Risk

Operational Risk

Liquidity Risk

Dependency

A Proposal for a Standard Approach: From Formula

to Spreadsheet

The Insurance Risk, CIR

Market Risk, CMR

Credit Risk, CCR

Operational Risk, COR

The Total Factor-Based Model

A Spreadsheet Approach

Parameter Estimates

An Example

PART C PRESENT AND FUTURE: EU SOLVENCY II - PHASE 2: GROUPS AND INTERNAL MODELING IN BRIEF

The European Union: Reinsurance, Insurance

Groups, and Financial Conglomerates

Reinsurance

Insurance Groups and Financial Conglomerates

The European Union: Solvency II - Phase II

Recommendations for the First Pillar

Recommendations for the Second Pillar

Recommendations for the Third Pillar

General Considerations

The First Wave of Requests (Pillar II)

The Second Wave of Requests Will Include the Following Issues

(Pillar I)

The Third Wave of Requests Will Include the Following Issues

(Pillar III)

A Brief Summary

Further Steps

Internal Models and Risk Management

Forecasting the Future and Risk Management

APPENDICES

Appendix A

A Proposal for a Standard Approach: One Step

toward Application

Insurance Risk

Market Risk

Credit Risk

Operational Risk

Appendix B

Insurance Classes

Non-Life Classes

Life Classes

Appendix C

From the Non-Life Directives

Solvency 0

Solvency I

Appendix D

From the Life Directives

Solvency 0

Solvency I

Appendix E

IAIS: Insurance Principles, Standards, and Guidelines

Principles

Standards

Guidances

Appendix F

From the Proposed Reinsurance Directive

Chapter 3: Rules Relating to the Solvency Margin and to the Guarantee

Fund

Appendix G

Annex I and Annex II in the Insurance Group

Directive

Annex I : Calculation of the Adjusted Solvency of Insurance

Undertakings

Annex II: Supplementary Supervision for Insurance Undertakings That

Are Subsidiaries of an Insurance Holding Company, a Reinsurance Undertaking or a Non-Member-Country Insurance Undertaking

Appendix H

From the Financial Conglomerates Directive

Amendments to the Non-Life Directive Made (EEC, 1973)

Amendments to the Life Directive (EEC, 1979)

Amendments to the Insurance Group Directive (COM, 1998)

Annex I: Capital Adequacy

Appendix I

Prudent Person Rule

Article 18: Investment Rules

Subject Categories

BISAC Subject Codes/Headings:
BUS027000
BUSINESS & ECONOMICS / Finance
MAT000000
MATHEMATICS / General
MAT029000
MATHEMATICS / Probability & Statistics / General