The Impact of Private Equity on a Life Insurer's Capital Charges Under Solvency II and the Swiss Solvency Test

46 Pages Posted: 15 Feb 2014

See all articles by Alexander Braun

Alexander Braun

University of St. Gallen - I.VW-HSG

Hato Schmeiser

University of Muenster - Faculty of Economics; University of St. Gallen - I.VW-HSG

Caroline Siegel

University of St. Gallen - Institute of Insurance Economics

Date Written: March 2014

Abstract

In this article, we conduct an in‐depth analysis of the impact of private equity investments on the capital requirements faced by a representative life insurance company under Solvency II as well as the Swiss Solvency Test. Our discussion begins with an empirical performance measurement of the asset class over the period from 2001 to 2010, suggesting that limited partnership private equity funds may be suited for the purpose of portfolio enhancement. Subsequently, we review the market risk standard approaches set out by both regulatory regimes and outline a potential framework for an internal model. Based on an implementation of these solvency models, it is possible to demonstrate that private equity is overly penalized by the standard approaches. Hence, life insurers aiming to exploit the asset class's return potential may expect significantly lower capital charges when applying an economically sound internal model. Finally, we show that, from a regulatory capital perspective, it can even be less costly to increase the exposure to private rather than public equity.

Suggested Citation

Braun, Alexander and Schmeiser, Hato and Siegel, Caroline, The Impact of Private Equity on a Life Insurer's Capital Charges Under Solvency II and the Swiss Solvency Test (March 2014). Journal of Risk and Insurance, Vol. 81, Issue 1, pp. 113-158, 2014. Available at SSRN: https://ssrn.com/abstract=2396238 or http://dx.doi.org/10.1111/j.1539-6975.2012.01500.x

Alexander Braun (Contact Author)

University of St. Gallen - I.VW-HSG ( email )

Kirchlistrasse 2
St. Gallen, 9010
Switzerland

Hato Schmeiser

University of Muenster - Faculty of Economics ( email )

Universitätsstr. 14-16
48143 Munster
Germany

University of St. Gallen - I.VW-HSG ( email )

Kirchlistrasse 2
St. Gallen, 9010
Switzerland

Caroline Siegel

University of St. Gallen - Institute of Insurance Economics ( email )

Tannenstrasse 19
St. Gallen, St. Gallen 9000
Switzerland

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