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Should the insurance industry be banking on risk escalation for solvency II?

Author

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  • Bryce, Cormac
  • Webb, Rob
  • Cheevers, Carly
  • Ring, P.
  • Clark, G.

Abstract

Basel II introduced a three pillar approach which concentrated upon new capital ratios (Pillar I), new supervisory procedures (Pillar II) and demanded better overall disclosure to ensure effective market discipline and transparency. Importantly, it introduced operational risk as a standalone area of the bank which for the first time was required to be measured, managed and capital allocated to calculated operational risks. Concurrently, Solvency II regulation in the insurance industry was also re-imagining regulations within the insurance industry and also developing operational risk measures. Given that Basel II was first published in 2004 and Solvency II was set to go live in January 2014. This paper analyses the strategic challenges of Basel II in the UK banking sector and then uses the results to inform a survey of a major UK insurance provider. We report that the effectiveness of Basel II was based around: the reliance upon people for effective decision making; the importance of good training for empowerment of staff; the importance of Board level engagement; and an individual's own world view and perceptions influenced the adoption of an organizational risk culture. We then take the findings to inform a survey utilizing structural equation modelling to analyze risk reporting and escalation in a large UK insurance company. The results indicate that attitude and uncertainty significantly affect individual's intention to escalate operational risk and that if not recognized by insurance companies and regulators will hinder the effectiveness of Solvency II implementation.

Suggested Citation

  • Bryce, Cormac & Webb, Rob & Cheevers, Carly & Ring, P. & Clark, G., 2016. "Should the insurance industry be banking on risk escalation for solvency II?," International Review of Financial Analysis, Elsevier, vol. 46(C), pages 131-139.
    • Handle: RePEc:eee:finana:v:46:y:2016:i:c:p:131-139
    DOI: 10.1016/j.irfa.2016.04.014
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    References listed on IDEAS

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    Cited by:

    1. Cormac Bryce & Thorsten Chmura & Rob Webb & Joel Stiebale & Carly Cheevers, 2019. "Internally Reporting Risk in Financial Services: An Empirical Analysis," Journal of Business Ethics, Springer, vol. 156(2), pages 493-512, May.
    2. Eling, Martin & Jia, Ruo, 2018. "Business failure, efficiency, and volatility: Evidence from the European insurance industry," International Review of Financial Analysis, Elsevier, vol. 59(C), pages 58-76.
    3. Hu, Bin & Hu, Yan-Ping, 2024. "A pricing model system for small and micro loan insurance considering limited claims," International Review of Financial Analysis, Elsevier, vol. 93(C).
    4. Hu, Mingya & Zhang, Yongjie & Feng, Xu & Xiong, Xiong, 2024. "How technological innovation influence operational risk: Evidence from banks in China," International Review of Financial Analysis, Elsevier, vol. 95(PB).
    5. Ghafoori, Eraj & Mata, Fernanda & Lauren, Nita & Faulkner, Nick & Tear, Morgan J., 2023. "Measuring risk culture in finance: Development of a comprehensive measure," Journal of Banking & Finance, Elsevier, vol. 148(C).

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    More about this item

    Keywords

    Operational risk; Risk escalation; Risk regulation; Basel II; Solvency II;
    All these keywords.

    JEL classification:

    • G2 - Financial Economics - - Financial Institutions and Services
    • L1 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance
    • L2 - Industrial Organization - - Firm Objectives, Organization, and Behavior
    • L5 - Industrial Organization - - Regulation and Industrial Policy
    • N2 - Economic History - - Financial Markets and Institutions

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