Browsing by Subject "pääomavaatimus"

The life insurance company invests the assets covering the technical provisions it has collected as insurance premiums in the capital markets. The purpose of the insurance company’s investment activities is to increase the ratio between the returns and indemnities paid to the policyholders and the insurance premiums paid by the policyholders, and thus improve the company’s price competitiveness in the insurance markets. As the insurance company seeks a higher return on the assets covering the technical provisions, the risk of the investment failure, and the consequent decrease in the value of the capital also increase. In order to cover the risk arising from the investment activities and the possible inability to fulfil its obligations with the policyholders, the Insurance Companies Act requires companies to raise sufficient amount of own funds from the capital investors to safeguard their solvency. The lowest allowable value of own funds is called solvency capital requirement (SCR). The value of the solvency capital required depends on the risk of the insurance company’s investments. The Finnish insurance legislation refers to the Solvency II Directive of the European Union, according to which the life insurance company’s basic own funds must cover an impairment of the investments covered by the technical provisions with a probability of 99.5% over a period of one year. The new business expected during the year shall also be taken into account. The Solvency II directive allows insurance companies to calculate the SCR using either a standard formula or different degrees of the insurance company’s internal models. The insurance company must always agree with the supervision authority on the use of the internal models. In Finland, the calculation of the solvency capital requirement is supervised by the Finnish Financial Supervisory Authority (FIN-FSA). It is generally believed that the SCR calculated with the standard formula differs significantly from the capital requirement achieved using the internal models. Previous studies have concluded this to be due to the standard formula imposing disproportionately high capital requirements for certain asset classes disregarding the diversification benefit within the asset classes. The standard formula has also been noticed to underestimate the diversification benefit between the asset classes. Therefore, the capital requirement under the standard formula is believed to limit the capability of the undercapitalized life insurance companies to hold financially sound, i.e. risk-return optimal portfolios. In this case, it is possible that the use of the standard formula will even increase the risk of business for some life insurance companies. In this research, the efficient portfolios with expected returns of 7.6-15.8% with the lowest achievable standard deviation are formed employing the asset classes for which the life insurance companies most commonly invest in, i.e. government bonds, real estates and equities. The expected returns and the standard deviations of the returns have been calculated from the return time series of investments in five European states: Germany, France, Spain, Finland and the UK. In addition, the return time series of the US markets have been selected to represent the western markets, while the return time series of the Japanese markets have been selected to represent the eastern markets. The return time series extend as far as the year 1870. For the efficient portfolios, the SCR has been calculated with both the standard formula and the commonly used VaR(1Y;99.5%) of the surplus model. The results indicate that the Value at risk approach rewards the insurance company from the diversification of the investments significantly more than the standard formula. Although the increasing portfolio return expectations lead to portfolios containing riskier assets and thus the capital requirement for individual investments in efficient portfolios increase, an increase in the number of the underlying assets, i.e. diversification, means that the total capital requirement for the portfolios in the Value at risk approach does not grow as fast as in the standard formula. In addition, the results of the research indicate that the standard formula penalizes investments outside the euro area more than the VaR(1Y;99.5%) of the surplus model. On the other hand, the capital requirement given by the standard formula was remarkably low for the euro area government bonds.