Regulation in the Financial Services Industry after the Crisis
Final Report Abstract
The recent fragility of financial markets revealed a number of weaknesses in the regulation of the international financial system. Insurance regulation has already been the subject of reforms in Europe before (Solvency II, Swiss Solvency Test), but the recent crisis offered an extraordinary opportunity for rethinking the architecture of insurance regulation. We have written several of papers related to regulatory arbitrage, lack of transparency, interdependencies in financial markets, and inappropriate accounting standards. First we have examined the fundamental definition of solvency capital requirements in Solvency II. We found different and conflicting definitions for these requirements in both academic literature and supervisors’ documents, which does not only create confusion but opens the door for regulatory arbitrage and undermines transparency. Our study provides clarity by comparing the different formulas and discussing their practical implications. In a second step we have discussed securities linked to demographic risks, which are increasing in importance not only because of economic efficiency reasons but also because of the regulatory trend toward market based valuation. Our analysis reveals that the popular forward rate concept combined with the common assumption of consistent, continuous and Markovian financial markets necessarily leads to models with a very specific interdependence structure. Understanding these implied interdependencies is crucial for justifying the appropriateness and applicability of demographic forward rate models. In a third step we have investigated the definition of actuarial assumptions underlying the accounting of life insurance liabilities. The regulatory requirement of conservative calculating is in practice commonly met using time-static risk calculation instead of time-dynamic risk calculation, although life insurance contracts typically have long contract horizons. We have developed the first truly timedynamic analysis of safety margins for general multi-state policies, providing a sound basis for a more appropriate accounting of long-term liabilities.
Publications
- (2013). Wenn Versicherte immer länger leben. Versicherungswirtschaft 10, 46-50
Hentschel, F. and M. Börger
