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Global consistent or market-oriented? A quantitative assessment of RBC standards, solvency II, and C-ROSS

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  • Liu, Shuyan
  • Jia, Ruo
  • Zhao, Yulong
  • Sun, Qixiang

Abstract

This paper reports large-scale inconsistency among the three solvency capital requirements (SCRs) — RBC standards, Solvency II, and C-ROSS. We show that the inconsistency in regulators' risk assessment is driven by the different portfolio structure among insurance markets. We construct three stylized asset portfolios and insurance portfolios to capture the three largest non-life insurance markets — the U.S., the European Union, and China. We estimate the SCRs for each stylized portfolio under the three solvency systems. The SCR inconsistency is economically large in terms of the overall SCRs, the solvency ratios, and the weights of SCR components for risk (sub-)modules. We find that regulators tend to charge a higher SCR to a large asset class and to a small insurance line of business. Our results suggest that the effective solvency systems are market oriented, and the attempt to move the market oriented SCRs towards a global consistent one may distort local regulation at costs.

Suggested Citation

  • Liu, Shuyan & Jia, Ruo & Zhao, Yulong & Sun, Qixiang, 2019. "Global consistent or market-oriented? A quantitative assessment of RBC standards, solvency II, and C-ROSS," Pacific-Basin Finance Journal, Elsevier, vol. 57(C).
    • Handle: RePEc:eee:pacfin:v:57:y:2019:i:c:s0927538x18302427
    DOI: 10.1016/j.pacfin.2018.10.002
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    2. Toloo, Mehdi & Tone, Kaoru & Izadikhah, Mohammad, 2023. "Selecting slacks-based data envelopment analysis models," European Journal of Operational Research, Elsevier, vol. 308(3), pages 1302-1318.

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    More about this item

    Keywords

    Financial regulation; Capital requirement; Risk-based capital; Solvency; Insurance;
    All these keywords.

    JEL classification:

    • G22 - Financial Economics - - Financial Institutions and Services - - - Insurance; Insurance Companies; Actuarial Studies
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation

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