Risk Management for Insurers
First published:
ISBN: 9781782722229
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Pillar I of Solvency II
Pillar I of Solvency II
Introduction
Risk Management
Financial Economics of Insurance
Underwriting Risks: Life Risk and Non-life Risk
Investment Risks: Market, Credit and Liquidity Risk
Non-financial Risks: Operational and Business Risk
The Financial Crisis: Consequences for Insurers
Insurance Supervision: From Solvency I to Solvency II
Insurance Supervision Outside the EU
Pillar I of Solvency II
Pillar II of Solvency II
Pillar III of Solvency II
Accounting Regulations
Banking Supervision: From Basel I to III
Management Control
Organising Risk Management
Bringing All the Strands Together
This chapter will examine Pillar I of Solvency II. As we have seen, Pillar I consists of quantitative requirements for risk management, and includes valuation principles for the balance sheet as well as two forms of minimum capital requirement.
VALUATION OF THE BALANCE SHEET
The Solvency II balance sheet is valued on economic principles. This means that all items are valued at market value as much as possible. Some assets can be valued at market value because there has been a recent market price that is representative. Examples are listed stocks and bonds. Other items, such as insurance liabilities, will need to be valued according to a model. In measuring the insurance liabilities, insurers should use the cost of capital method to determine the risk margin (see Chapter 8).
To discount the liabilities, EIOPA prescribes the interest rate curve on an annual basis to use as a discount rate for the cashflows. This means that companies need to assess the best-estimate value of their insurance liabilities, including the value of the hedgeable risks and the value of embedded options and guarantees. For unhedgeable risks, the cost of capital approach is used to determine the risk
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