The Standard Formula of Solvency II: A critical discussion

Establishing a standard formula (SF) for the regulation of European insurance companies is a Herculean task. It has to acknowledge very different business models and national peculiarities. In addition, regulatory authorities as a stakeholder in its own have a number of supervisory objectives the SF should incentive. With the intervention of the SF in economic activities, the principle of equal treatment must be maintained. The large circle of users makes its procedural simplicity indispensable to ensure that it is applied and implemented in a proportionate manner. Above all, the SF should be risksensitive. Compared to Solvency I, the SF of Solvency II is considered a significant improvement, as many of the aforementioned desiderata have been much better realized. The following analysis and survey of model-theoretical aspects of the SF shows that these improvements could be achieved above all with regard to epistemic uncertainties. The stochastic model underneath the SF is still subject to considerable uncertainties; so that the probability functional of the SF is exposed to significant model risk. As part of the Own Risk and Solvency Assessment (ORSA), insurance companies must prove the adequacy of the SF for their company. The vague prior knowledge represented by the stochastic component of the SF is not suffcient for an SF intrinsic validation of the aleatoric component.     «

Establishing a standard formula (SF) for the regulation of European insurance companies is a Herculean task. It has to acknowledge very different business models and national peculiarities. In addition, regulatory authorities as a stakeholder in its own have a number of supervisory objectives the SF should incentive. With the intervention of the SF in economic activities, the principle of equal treatment must be maintained. The large circle of users makes its procedural simplicity indispensa...     »