Regulatory measures for distressed insurance undertakings: A comparative study.

In Europe, the introduction of the regulatory scheme Solvency II wants to improve risk management practices in insurance undertakings. One aspect of the new regulatory rules is an improved supervision of distressed insurance undertakings. In case that the insurance undertaking is in financial distress, the regulator may force it to take appropriate precautionary measures to avoid bankruptcy. In this article, we compare the two most common regulatory measures in case of distress: A decrease of the asset investment risk and a capital injection. In a Black-Scholes-Merton economy, we model the insurance undertaking's assets and liabilities by a structural default model. Both from the perspective of the insurance undertaking and the policyholder, we analyze the change in bene fits if the regulator enforces precautionary measures in distress. We find that the aset risk reduction seems most efficient in terms of lowering default probability and increasing the benefits of insurance undertaking and policyholders.     «

In Europe, the introduction of the regulatory scheme Solvency II wants to improve risk management practices in insurance undertakings. One aspect of the new regulatory rules is an improved supervision of distressed insurance undertakings. In case that the insurance undertaking is in financial distress, the regulator may force it to take appropriate precautionary measures to avoid bankruptcy. In this article, we compare the two most common regulatory measures in case of distress: A decrease of th...     »