Capital Requirements, Disclosure, and Supervision in the European Insurance Industry: New Challenges towards Solvency II

304 Pages·2014·2.274 MB·English

by  Maria Grazia Starita, Irma Malafronte (auth.)

Capital Requirements, Disclosure, and Supervision in
the European Insurance Industry
Capital Requirements,
Disclosure, and Supervision
in the European Insurance
Industry
New Challenges towards Solvency II
Maria Grazia Starita
University of Naples ‘Parthenope’, Italy
and
Irma Malafronte
University of Naples ‘Parthenope’, Italy
© Maria Grazia Starita and Irma Malafronte 2014
Foreword © Claudio Porzio 2014
Softcover reprint of the hardcover 1st edition 2014 978-1-137-39083-7
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First published 2014 by
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ISBN 978-1-349-48275-7 ISBN 978-1-137-39084-4 (eBook)
DOI 10.1057/9781137390844
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Library of Congress Cataloging-in-Publication Data
Starita, Maria Grazia, 1975– and Malafronte, Irma, 1986–
Capital requirements, disclosure, and supervision in the European insurance
industry: new challenges towards Solvency II / Maria Grazia Starita, Irma
Malafronte.
pages cm
ISBN 978-1-349-48275-7
1. Insurance – Europe. 2. Insurance – State supervision – Europe.
3. Working capital – Europe. 4. Capital – Europe. I. Starita, Maria
Grazia, 1975– II. Malafronte, Irma, 1986–
HG8592.Z75S73 2014
368.0068(cid:2)1—dc23 2014024824
Contents
List of Boxes v iii
List of Figures i x
List of Tables x i
Foreword x iii
Claudio Porzio
Acknowledgements x vi
1 Introduction 1
1.1 S olvency II Directive and the key features of the
European insurance market 1
1.2 The solvency capital requirement 3
1.3 The supervision of insurance companies 6
1.4 The regulatory framework for market discipline 7
1.5 The actual disclosure 9
Part I The Framework of Solvency II and
the Characteristics of the European
Insurance Market
2 Solvency II Directive and the Key Features of the European
Insurance Market 1 3
2.1 Aims and scope of the Solvency II Directive 13
2.1.1 The ‘overall solvency’ approach 14
2.1.2 The three-pillar structure 29
2.1.3 Enhancing the risk management practices 37
2.2 The European insurance industry 4 0
2.2.1 Life insurance business in Europe 40
2.2.2 Non-life insurance business in Europe 44
2.2.3 Insurance industry and economic development 49
2.3 An empirical analysis of a sample of European insurers 52
2.3.1 The selection criteria 53
2.3.2 The sample 53
2.3.3 Descriptive statistics 54
v
vi Contents
Part II Solvency: Requirements and
Supervision
3 The Solvency Capital Requirement 61
3.1 The solvency capital requirement 6 1
3.1.1 A ssets, other liabilities, technical provisions,
and own funds according to Solvency II 62
3.1.2 The modular approach to calculate the SCR 76
3.1.3 T he new capital requirement and the insurer’s
economic capital: what are the differences and
similarities? 100
3.2 The minimum capital requirement 1 03
3.2.1 The role of the minimum capital requirement 103
3.2.2 The approach proposed by Solvency II 107
3.2.3 A review of trigger events 110
3.3 A n empirical analysis of the European insurers’
requirements 1 12
3.3.1 T he estimate of assets and technical provisions
according to the standard formula 113
3.3.2 The estimation of the SCR 114
3.3.3 The estimation of the MCR 119
4 The Supervision of Insurance Companies 121
4.1 Risk management 1 21
4.1.1 Internal control system 126
4.1.2 Risk management framework 130
4.1.3 Asset-liability management 137
4.2 Supervision 1 41
4.2.1 The duties of supervisors 142
4.2.2 The supervisory review process 145
4.2.3 The virtuous cycle or the vicious cycle? 154
4.3 An empirical analysis of corporate governance 158
4.3.1 A description of the internal control system 160
4.3.2 A description of the risk management practices 164
4.3.3 A description of the investment activity 170
Part III The Relationship between Required
Reporting and Actual Disclosure
5 The Regulatory Framework for Market Discipline 177
5.1 M arket discipline through insurance and reinsurance
undertakings 1 77
5.1.1 S upervisory authorities and market discipline in
the European insurance industry 178
Contents vii
5.1.2 I nformation addressed to supervisory
authorities for supervision purposes 193
5.1.3 P ublic disclosure by European insurance and
reinsurance undertakings 197
5.2 Market discipline through supervisory authorities 201
5.2.1 I nformation disclosure by supervisory
authorities to EIOPA 201
5.2.2 The duties of EIOPA 203
5.2.3 Disclosure by insurance groups 206
5.3 T he stakeholders involved in the market
discipline process 2 10
5.3.1 T he roles of the actors involved in the
disclosure process 210
5.3.2 The role of internal stakeholders 218
5.3.3 The role of external stakeholders 219
6 The Actual Disclosure 224
6.1 Disclosure and the call for enhanced information levels 225
6.1.1 D isclosure and related topics: definitions,
differences, and similarities 225
6.1.2 The call for enhanced information levels 234
6.1.3 A review of the evidence on disclosure 241
6.2 The duality of the quality and quantity of disclosure 250
6.2.1 Qualitative and quantitative disclosure 251
6.2.2 The content analysis methodology 256
6.2.3 Initiatives in favour of greater disclosure 262
6.3 An empirical analysis of disclosure levels 264
6.3.1 The need to measure disclosure 265
6.3.2 Constructing a disclosure index for insurers 271
6.3.3 T he level of disclosure in the European
insurance industry 275
7 Conclusions 2 84
7.1 Moving forward 2 84
7.2 T he simplicity and consistency of the new capital
requirement 2 85
7.3 T he continuous monitoring of solvency and the
culture of risk 2 87
7.4 T he disclosure of the insurer’s solvency: the connection
between the three pillars 2 88
7.5 Insurers’ disclosure 2.0 2 89
Index 291
List of Boxes
2.1 The solvency margin 1 7
2.2 The Lamfalussy process (or the comitatology in
financial services legislation) and Solvency II 1 9
2.3 When Solvency II comes into force? 2 6
2.4 Quantitative impact study 2 7
3.1 The counter-cyclical premium risk 9 9
4.1 The risk profile capital add-on 1 53
4.2 Forward-Looking Assessment of Own Risk 1 57
5.1 The International Association of Insurance Supervisors 1 90
5.2 Value creation for stakeholders: a look at
companies’ websites 212
6.1 Benefits from disclosure 2 44
6.2 History of the content analysis methodology 2 56
viii
List of Figures
2.1 T he three-pillar structure of Solvency II 29
2.2 T he conceptual framework of an internal model
under Solvency II 3 9
2.3 G ross written life insurance premiums 42
2.4 L ife insurance benefits paid 42
2.5 L ife insurers’ investment portfolios 43
2.6 G ross written non-life insurance premiums 44
2.7 N on-life insurance claims paid 45
2.8 H eath insurance: gross premiums written and claims paid 46
2.9 M otor insurance: gross premiums written and claims paid 47
2.10 P roperty insurance: gross premiums written and
claims paid 4 8
2.11 N on-life insurers’ investment portfolios 48
2.12 G ross written premiums 4 9
2.13 B enefits and claims paid 50
2.14 I nsurers’ investment portfolios 50
3.1 T he insurer’s balance sheet 63
3.2 T he characteristics of the risks underlying the insurance
business and the range of methodologies to assess the
capital requirements 6 4
3.3 C omparison between the components for the
calculation of the SCR and the components for its coverage 75
3.4 T he SCR according to the standard formula 80
3.5 T he SCR and economic capital 101
4.1 T he control performed by internal control system,
risk management framework, and asset-liability
management 1 23
4.2 T he responsibilities of the AMSB, CEO, and
senior management 1 25
4.3 T he relationship between the requirements and the SRP 146
4.4 T he continuous cycle of the SRP 148
4.5 T he ‘supervisory ladder’ 152
4.6 T he ORSA virtuous cycle 156
5.1 S upervision and market discipline within the
Solvency II Directive 1 82
ix
x List of Figures
5.2 T he flows of information in the market discipline
process under Solvency II 1 94
5.3 I nternal and external stakeholders involved in the
market discipline process 2 16
5.4 I nternal/external and direct/indirect stakeholders 219
6.1 D isclosure and related topics: definitions 227
6.2 M andatory disclosure and voluntary disclosure 231
6.3 D isclosure process: definition and assumptions 232
6.4 C all for enhanced information levels 235
6.5 P rocedure for measuring disclosure 268
6.6 K ey elements of the empirical research 271
6.7 R isk Disclosure Index 2 73
6.8 R isk disclosure practices by insurance companies 278