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Following the United Kingdom's (UK) withdrawal from the European Union (EU), there is uncertainty in the financial services industry on equivalence of regulatory regimes. This also affects the insurance industry. As of now, it is not clear if the UK’s supervisory regime (“Solvency UK”) will be classified as equivalent to the European Solvency II supervisory regime. After no equivalence decision was taken during the Brexit transition period and there are efforts by the UK in the form of the UK Solvency II Review and the Financial Services and Markets Bill to adapt Solvency II more to the characteristics of the national insurance market, the uncertainties are intensified. Although Solvency II non-equivalence would have a significant impact on insurance groups operating in both the UK and the EU, there has been no detailed analysis of whether these initiatives could have an impact on a future Solvency II equivalence decision. The purpose of this paper is to address and close this research gap with a literature review and a subsequent equivalence mapping and discussion.

Based on the literature review methodology, this paper draws on academic sources as well as publications from governments and regulators, articles from consultancies and subject matter experts and uses this literature to provide an overview of the current state of research on equivalence in the wider financial services industry, but specifically on Solvency II equivalence, the UK Solvency II Review and the Financial Services and Markets Bill. Based on this literature review, the paper also forms the basis for an innovative and forward-looking Solvency II equivalence mapping and discussion.

Several articles state that differences between Solvency II and Solvency UK could harm a future Solvency II equivalence decision. The UK Solvency II Review and the Financial Services and Markets Bill are two initiatives that support the objective of aligning the Solvency II supervisory regime more closely with the circumstances of the UK insurance market. Although both initiatives contribute to the fact that Solvency UK differs in parts from Solvency II, based on the literature review and the subsequent equivalence mapping and discussion, there are currently no reforms that should harm future Solvency II equivalence decisions.

This paper provides a previously non-existent overview of equivalence in the wider financial services industry, but specifically on Solvency II equivalence, the UK Solvency II Review and the Financial Services and Markets Bill, and brings them together in an innovative equivalence discussion. It thus presents the current state of knowledge on Solvency II after Brexit and develops it further around a mapping against the equivalence criteria. As non-equivalence could have significant implications for insurance groups operating in both the UK and the EU, this paper is a useful and practical study that provides a previously non-existent equivalence mapping and discussion based on current initiatives and publications. It thus closes the research gap identified and reduces uncertainties in the insurance industry and can be used as a blueprint for detailed and forward-looking equivalence mappings and discussions for the wider financial services industry.

Interest rate risk, i.e. the risk of changes in the interest rate term structure, is of high relevance in insurers' risk management. Due to large capital investments in interest rate sensitive assets such as bonds, interest rate risk plays a considerable role for deriving the solvency capital requirement (SCR) in the context of Solvency II. This paper seeks to address these issues.

In addition to the Solvency II standard model, the author applies the model of Gatzert and Martin for introducing a partial internal model for the market risk of bond exposures. After introducing calibration methods for short rate models, the author quantifies interest rate and credit risk for corporate and government bonds and demonstrates that the type of process can have a considerable impact despite comparable underlying input data.

The results show that, in general, the SCR for interest rate risk derived from the standard model of Solvency II tends to the SCR achieved by the short rate model from Vasicek, while the application of the Cox, Ingersoll, and Ross model leads to a lower SCR. For low‐rated bonds, the internal models approximate each other and, moreover, show a considerable underestimation of credit risk in the Solvency II model.

The aim of this paper is to assess model risk with focus on bonds in the market risk module of Solvency II regarding the underlying interest rate process and input parameters.

The purpose of this paper is to analyze how enterprise risk management (ERM), the system of governance and the Own Risk and Solvency Assessment (ORSA) have been boosted with the entry of Solvency II.

For this analysis, the authors have undertaken a survey of chief risk officers (CROs) working in Spanish insurance companies.

The results show that Solvency II has definitely promoted ERM in the European insurance industry and improved the system of governance of the insurance companies, and that the perceived value of the ORSA for the companies is higher than the cost. It is clear that the quality of ERM implemented by companies is higher in those that face more complex risks and with greater interdependencies – that is, larger companies, foreign insurers and insurers with several lines of business – but is unaffected by the legal form of the entity (mutual/corporation).

This study conducts primary research with surveys of CROs and develops a measure of the quality of ERM implemented by insurance companies.

This paper seeks to provide an overview on potential impacts German primary life insurers are exposed to in relation to upcoming Solvency II regulation and potential strategic choices, especially in the light of halting low‐interest rates. Given a large degree of complexity, the paper aims at giving some guidance to decision makers considering a discontinuation of underwriting.

The paper builds upon current observations made in the German primary life insurance industry, especially, recent strategic decisions of two market participants to discontinue their life insurance carriers. On the background of low‐interest rates but yet guaranteed interest participations and additional capital requirements arising from Solvency II, the paper illustrates the strategic options life insurers have in the German market, given the specific market environment.

Regulatory capital requirements of Solvency II will sanction guarantee products in a way that for some insurers life products will become unattractive. As there is evidence in the market that some participants have started to consider the run‐off option for selected carriers, the paper finds that this option may represent an appropriate consequence not only for foreign insurers ceasing their business in Germany but also for domestic insurance groups. Given the specific rules‐in‐use in the German primary life insurance market, the paper discusses the controlled run‐off approach as a strategic option for selected life insurers, enabling a harvesting strategy through maximizing cash flows from existing liabilities while avoiding further investments.

Discussions in this paper help to bring into focus the strong challenges by both the upcoming regulatory Solvency II and current market conditions. The brief case study included in this paper may illustrate the implications as well as some crucial success factors of discontinued life business.

The concept of value at risk is used in the risk-based calculation of solvency capital requirements in the Basel II/III banking regulations and in the planned Solvency II insurance regulation framework planned in the European Union. While this measure controls the ruin probability of a financial institution, the expected policyholder deficit (EPD) and expected shortfall (ES) measures, which are relevant from the customer's perspective as they value the amount of the shortfall, are not controlled at the same time. Hence, if there are variations in or changes to the asset-liability situation, financial companies may still comply with the capital requirement, while the EPD or ES reach unsatisfactory levels. This is a significant drawback to the solvency frameworks. The paper aims to discuss these issues.

The author has developed a model framework wherein the author evaluates the relevant risk measures using the distribution-free approach of the normal power approximation. This allows the author to derive analytical approximations of the risk measures solely through the use of the first three central moments of the underlying distributions. For the case of a reference insurance company, the author calculates the required capital using the ruin probability and EPD approaches. For this, the author performs sensitivity analyses considering different asset allocations and different liability characteristics.

The author concludes that only a simultaneous monitoring of the ruin probability and EPD can lead to satisfactory results guaranteeing a constant level of customer protection. For the reference firm, the author evaluates the relative changes in the capital requirement when applying the EPD approach next to the ruin probability approach. Depending on the development of the assets and liabilities, and in the cases the author illustrates, the reference company would need to provide substantial amounts of additional equity capital.

A comparative assessment of alternative risk measures is relevant given the debate among regulators, industry representatives and academics about how adequately they are used. The author borrows the approach in parts from the work of Barth. Barth compares the ruin probability and EPD approach when discussing the RBC formulas of the US National Association of Insurance Commissioners introduced in the 1990s. The author reconsiders several of these findings and discusses them in the light of the new regulatory frameworks. More precisely, the author first performs sensitivity analyses for the risk measures using different parameter configurations. Such analyses are relevant since in practice parameter values may differ from estimates used in the model and have a significant impact on the values of the risk measures. Second, the author goes beyond a simple discussion of the outcomes for each risk measure, by deriving the firm conclusion that both the frequency and magnitude of shortfalls need to be controlled.

The purpose of this paper is to study the risk of misspecifying solvency models for insurance companies.

Based on a basic solvency model, the authors examine the sensitivity of different risk measures with respect to model misspecification. An analysis considers the effects of introducing stochastic jumps and linear, as well as non‐linear dependencies into the basic setting on the solvency capital requirements, shortfall probability and expected policyholder deficit. Additionally, the authors take a regulatory view and consider the degree to which the deviations in risk measures, due to the different model specifications, can be diminished by means of requiring interim financial reports.

The simulation results suggest that the sensitivity of solvency capital as a risk measure – as it is in regulatory practice – underestimates the actual misspecification risk that policyholders are exposed to. It is also found that semi‐annual mandatory interim reports can already reduce the model uncertainty faced by a regulator, significantly. This has important implications for the design of risk‐based capital standards and the implementation of internal solvency models.

The results from the Monte Carlo simulation show that changes in the specification of a solvency model have a much greater impact on shortfall probabilities and expected policyholder deficits than they have on capital requirements. The shortfall risk measures react much more sensitively to small changes in the model assumptions, than the capital requirements. This leads us to the conclusion that regulators should not solely rely on capital requirements to monitor the solvency situation of an insurer, but should additionally consider shortfall risk measures. More precisely, an analysis of model risk focusing on the sensitivity of capital requirements will typically underestimate the relevant risk of model misspecification from a policyholder's perspective. Finally, the simulation results suggest that mandatory interim reports on the solvency and financial situation of an insurance company are a powerful tool in order to reduce the model uncertainty faced by regulators.

The determination of the capital requirements represents the first Pillar of Solvency II. The main purpose of the new solvency regulation is to obtain more realistic modelling and assessment of the different risks insurance companies are exposed to in a balance‐sheet perspective. In this context, the Solvency Capital Requirement (SCR) standard calculation is based on a modular approach, where the overall risk is split into several modules and submodules. In Solvency II, standard formula longevity risk is explicitly considered. The purpose of this paper is to look at the backtesting approach for measuring the consistency of SCR calculations for life insurance policies.

A multiperiod approach is suggested for correctly calculating the SCR in a risk management perspective, in the sense that the amount of capital necessary to meet company future obligations year by year until the contract will be in force has to be assessed. The backtesting approach for measuring the consistency of SCR calculations for life insurance policies represents the main contribution of the research. In fact this kind of model performance is generally specified in the VaR validation analysis. In this paper, this approach is considered for testing the ex post performance of SCR calculation methodology.

The backtesting framework is able to measure, from time to time, if the insurer has allocated more or less capital to support his in‐force business, with adverse effects on free reserves and profitability or solvency.

The paper shows that the forecasting performance is an important aspect to assess the effectiveness of the model, a poor performance corresponding to a biased allocation of capital.

The backtesting approach for measuring the consistency of SCR calculations for life insurance policies represents the main contribution of the research. In fact this kind of model performance is generally specified in the VaR validation analysis. Recently, Dowd et al. have proposed it for verifying the goodness of mortality models and now, in this paper, this approach is considered for testing the ex post performance of SCR calculation methodology.

The area of law where the principle of transparency is applicable is expanding fast. Also many financial markets have recently become subject to new regulations requiring transparency, such as EU directives MIFID II or Solvency II. Here, what is expanding is not just the applicability of the principle as such, but also the scope of issues which are affected by transparency, that is, remuneration or conflict of interests. In the light of these regulations, it may seem that transparency has simply become a sole legislative measure assuring values such as consumer protection, market stability or – most of all – high-quality governance. Indeed, transparency is thought to contribute to the quality of governance in several different ways, although its implementation must meet certain standards if it is to produce the desired results, especially when it comes to financial institutions. Financial institutions are commonly required to be particularly transparent due to the fact they often act as public trust entities. As the activity of financial institutions is of such importance, the issue of transparency efficiency is worth discussing. Although it is said that the emergence of the principle of transparency in the EU law is a fairly new phenomenon, the existence of transparency obligation is not. Therefore, some doubts may arise as to the question whether the principle of transparency actually adds much to existing rules and principles. In this chapter the author explored and discussed how mandatory transparency affects financial institutions’ activity, and whether it performs its function efficiently.

The purpose of this article is to investigate the impact of counterparty risk on the basis risk of industry loss warranties as well as on reinsurance with and without collateral under different dependence structures. The authors additionally compare the solvency and Sharpe ratio for different premium loadings and contract parameters.

The authors propose a model framework extension to account for the counterparty risk of risk transfer arrangements. Copulas are used to also take into account non-linear dependencies between risk factors, and Monte Carlo simulation is employed to derive numerical results and to conduct sensitivity analyses.

The authors show that the impact of counterparty risk is particularly pronounced for higher degrees of dependencies and tail dependent losses, i.e. in cases of basis risk levels that appear low if counterparty risk is not considered. With respect to counterparty risk management, the authors find that already partial collateralization limits counterparty and basis risk to more acceptable levels.

The study results are particularly relevant to practitioners, as insurers may not only underestimate the “true” basis risk of index-linked instruments, but also the effect of counterparty risk of reinsurance contracts along with the consequences for solvency and profitability.

The authors extend existing literature by allowing for the (partial) default of industry loss warranties and reinsurance under different dependence structures. Furthermore, the authors include profitability in addition to risk considerations. The interaction effects between counterparty risk and the basis risk of index-based alternative risk transfer instruments are largely unstudied, despite their considerable relevance in practice.