Discretionary Decisions in Capital Requirements under Solvency II

ICIR Working Paper Series No. 50

45 Pages Posted: 25 Jul 2023

See all articles by Nicolaus Grochola

Nicolaus Grochola

Goethe University Frankfurt

Sebastian Schlütter

University of Applied Sciences Mainz

Date Written: July 2023

Abstract

European insurers are allowed to make discretionary decisions in the calculation of Solvency II capital requirements. These choices include the design of risk models (ranging from a standard formula to a full internal model) and the use of long-term guarantees measures. This article examines the impact and the drivers of discretionary decisions with respect to capital requirements for market risks. In a first step of our analysis, we assess the risk profiles of 49 stock insurers using daily market data. In a second step, we exploit hand-collected Solvency II data for the years 2016 to 2020. We find that long-term guarantees measures substantially influence the reported solvency ratios. The measures are chosen particularly by less solvent insurers and firms with high interest rate and credit spread sensitivities. Internal models are used more frequently by large insurers and especially for risks for which the firms have already found adequate immunization strategies.

Keywords: Solvency II, capital requirements, discretionary decisions

JEL Classification: G22, G28, G32

Suggested Citation

Grochola, Nicolaus and Schlütter, Sebastian, Discretionary Decisions in Capital Requirements under Solvency II (July 2023). ICIR Working Paper Series No. 50, Available at SSRN: https://ssrn.com/abstract=4516263 or http://dx.doi.org/10.2139/ssrn.4516263

Nicolaus Grochola (Contact Author)

Goethe University Frankfurt ( email )

Theodor-W.-Adorno-Platz 3
Frankfurt, 60323
Germany

Sebastian Schlütter

University of Applied Sciences Mainz ( email )

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