Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/64132
Authors: 
Fischer, Katharina
Schlütter, Sebastian
Year of Publication: 
2012
Series/Report no.: 
ICIR Working Paper Series 09/12
Abstract: 
The standard formula of the Solvency II framework employs an approximate value-at-risk approach to define risk-based capital requirements. The parameterization of the standard formula determines how much additional capital insurers need in order to back investments in risky assets. This paper investigates how the standard formula's stock risk calibration influences the equity position and investment strategy of a shareholder-value-maximising insurance company. Intuitively, a higher stock risk parameter should reduce the insurer's risky investments as well as his insolvency risk. However, by considering the insurer's equity level as an endogenous variable, we identify situations in which a stricter stock risk calibration leads to a significant reduction of stock investments, but leaves the actual solvency level virtually unaffected, since the insurer also lowers his equity capital position. While previous articles only deal with the statistical accuracy of the standard formula's calibration, our results shed light on the incentives resulting from different calibrations.
Subjects: 
solvency regulation
capital requirements
asset allocation
insurer default risk
Document Type: 
Working Paper

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