Implications of the Solvency II Regulations for Investment Incentives
Master thesis
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Date
2016-09-02Metadata
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- Master Thesis [4490]
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.