Group Aspects of Regulatory Reform in the Insurance Sector
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Group Aspects of Regulatory Reform in the Insurance Sector Patrick Darlap and Bernhard Mayr* Austrian Financial Market Authority, Praterstrasse 23, Vienna 1020, Austria. E-mail: [email protected]
This article discusses group aspects that may be expected to be important determinants of regulatory reform in the insurance sector. Basically, we deal with the question of whether the risk level of a group is higher or lower than the simple sum of risks of all institutions individually. The application of simple portfolio theory to explain overall group risks may be myopic. A holistic approach to assess group (concentration) risks also has to cover risks that portfolio theory does not take into account, for example, reputational effects, contagion, etc. In fact, the diversification gains from a large group portfolio may well be outweighed by the risks encountered at group level. In order to assess group risks, we advocate the use of copula-based economic capital models. We believe that this procedure allows a more adequate judgement on group risks than traditional methods, which are generally based on rather restrictive assumptions. Data constraints, however, may impair an early implementation of such models. An early start of data collection for adequate modelling and further research on copulas have to be understood as prerequisites to advanced solvency determination in groups. The Geneva Papers (2006) 31, 96–123. doi:10.1057/palgrave.gpp.2510059 Keywords: regulation; insurance groups; Solvency II; diversification; financial stability; financial conglomerates
New Scope of Insurance Supervision The aim of insurance supervision is – more than in banking supervision – the protection of the individual consumer. The system of risk sharing within a community, the with-profits concept of many insurance products and the (hidden or open) reserves of an individual insurer are – inter alia – the reason for the widely perceived lack in compatibility of the insurance business with a group-oriented supervisory system. This is the reason for an almost entire solo-entity orientation. However, financial group and conglomerate aspects have come to the fore of regulatory discussion several years ago and pose steadily increasing challenges to regulators and supervisory authorities alike: There are not only the questions of double gearing or excessive leveraging on a company’s own funds, which are to be resolved (and to which legal frameworks were
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The views expressed in this paper are those of the authors and do not necessarily reflect the opinion of the institution they represent.
Patrick Darlap and Bernhard Mayr Regulatory Reform in the Insurance Sector
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to be adapted1), but also the cooperation between supervisors has to be explicitly defined2 and solo supervision of companies possibly reconceived.3 The current Solvency II project, as it is being developed by the International Association of Insurance Supervisors (IAIS) and the Committee of European Insurance and Occupational Pension Supervisors (CEIOPS), will have to ta
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