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Implications of the Solvency II Regulations for Investment Incentives

Berglund, Eirik Håland; Stensletten, Tord Tungeland
Master thesis
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URI
http://hdl.handle.net/11250/2403968
Date
2016-09-02
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  • Master Thesis [4207]
Abstract
We analyze optimal investment incentives for a medium sized insurance company complying

with the Solvency II regulations. Assuming that market investments are made

independent of other operations, we find that the insurance company has incentives to

increase investment in low stress factor equities. If the Solvency II standard formula

stress test is a good estimation of the underlying risk, this leads to a reduction in risk

taken by the insurance company.

Allowing for reallocation of the market portfolio after reporting capital requirements

decreases the risk reduction incentive. This effect may be mitigated by introducing

transaction costs. At last we do not impose Solvency II restrictions on investment, but

model the effect of supervisory intervention at a future date. This leads to risk reducing

incentives for the insurancy company, contingent on the viability of the supervisory

intervention threat.

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