Ci a ion: Ga aye a, A.; De la Peña,
J.I.; T igo, E. Towa ds a Global
Sol ency Model in he Insu ance
Ma ke : A Quali a i e Analysis.
Sus ainabili y 2022,14, 6465. h ps://
doi.o g/10.3390/su14116465
Academic Edi o s: Chia-Lin Chang,
An ónio Ab eu and
Ca los Ma in-Rios
Recei ed: 17 Feb ua y 2022
Accep ed: 19 May 2022
Published: 25 May 2022
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sus ainabili y
A icle
Towa ds a Global Sol ency Model in he Insu ance Ma ke : A
Quali a i e Analysis
Asie Ga aye a 1, J. Iñaki De la Peña 1,* and Edua do T igo 2
1Financial Economics I Depa men , Uni e si y o he Basque Coun y (UPV/EHU), 48015 Bilbao, Spain;
asie [email p o ec ed]
2Finance and Accoun ing Depa men , Uni e si y o Malaga (UMa), 29071 Málaga, Spain; [email p o ec ed]
*Co espondence: [email p o ec ed]; Tel.: +34-946013876
Abs ac :
In ecen yea s, he e has been a change in he main egula ions go e ning he sol ency o
he wo ld’s main insu ance ma ke s. Sus ainabili y is an issue ha is becoming inc easingly impo an
among o he a ious s akeholde s in he insu ance indus y. I is a complex concep ha has many
di e en dimensions ha can be included in hese egula ions, allowing o a mo e sus ainable
sol ency. The pape uses a quali a i e model p e iously designed and es ed in he li e a u e o
analyse he sol ency egula ions o he Eu opean Union, Uni ed S a es o Ame ica, China, Aus alia,
B azil and Sou h A ica and de e mine hei le el o con e gence. I also links he c i e ia se ou in
hese models o he dimensions o sus ainabili y in o de o de e mine he deg ee o sus ainabili y o
sol ency sys ems and he ques ions ha egula o s will need o conside in he nea u u e in o de o
achie e mo e sus ainable sol ency.
Keywo ds:
insu ance sus ainabili y; insu ance supe ision; isk managemen ; capi al equi emen s;
sol ency
1. In oduc ion
Sus ainabili y is an inc easingly impo an opic in he insu ance indus y. The deba e
began in 1997 wi h he c ea ion o he Uni ed Na ions En i onmen P og amme Finance
Ini ia i e (UNEP FI) [
1
]. This o ganisa ion p omo es esea ch and de elopmen in sus ain-
able insu ance. Among o he s, he global su ey on he s a us o sus ainable insu ance [
2
],
he p omulga ion o he P inciples o Sus ainable Insu ance [
3
] and he agenda o hei
implemen a ion [4].
Sus ainabili y is a concep ha has a ious de ini ions [
5
] and dimensions [
6
] in he
ield o insu ance indus y’s in es men s (Table 1).
Sol ency mus be unde s ood as he gua an ee o adequa e capi al o mee liabili ies
o policyholde s and bene icia ies. Regula ion can be adjus ed o inco po a e one o mo e
elemen s o he abo e dimensions in o de o make sol ency mo e sus ainable (sus ainable
sol ency [
7
]). In he insu ance sec o , he en i onmen al dimension, especially clima e
change because o i s impac on unde w i ing isk, and he go e nance dimension a e
impo an . The quali a i e pilla s o mos insu ance egula ions deal wi h his dimension o
a g ea e o lesse ex en . Howe e , he de elopmen o he concep o sus ainable sol ency
in he li e a u e is sca ce and limi ed o se e al pape s including [6,8–11].
The main pu pose o insu e s is o accep , manage and ans e Risks. The e o e, isk
managemen is a undamen al elemen ha mus conside all hese dimensions. Acco d-
ing o [
9
], he dimensions in Table 1 equi e s a egic isk managemen , while sol ency,
sus ainable o no , equi es ac ical isk managemen .
In ecen yea s, changes in sol ency egula ions ha e led o he de elopmen o ac ical
isk managemen and p omo ed a p ocess o con e gence, which analysis may be use ul
o s a egic isk managemen . This is because some egula o s [
12
–
14
] now conside ha
Sus ainabili y 2022,14, 6465. h ps://doi.o g/10.3390/su14116465 h ps://www.mdpi.com/jou nal/sus ainabili y
Sus ainabili y 2022,14, 6465 2 o 18
insu ance egula ion implici ly add esses he en i onmen al and go e nance dimensions
o sus ainabili y and plan o add ess hem explici ly in he u u e [14,15].
Table 1. Dimensions o sus ainabili y in in es men s: Sou ce: [6].
En i onmen al Social Go e nance
Clima e change Human igh s
Boa d s uc u e, size, di e si y,
skills and independence
Renewable ene gy Wo kplace heal h and sa e y Execu i e pay
Ai , wa e o esou ce
deple ion/pollu ion
Human capi al
managemen /employee
ela ions
B ibe y and co up ion
Changes in land use Di e si y In e nal con ols and isk
managemen
Con o e sial weapons
In he case o insu ance companies, he ela ionship be ween sus ainabili y and sol-
ency has been h ough pensions [
7
]. Al hough he e a e a eas such as Eu ope ha ha e
begun o es ablish p ocesses such as he Eu opean commission o opinion on sus ainabili y
wi hin Sol ency II, ocused on he sui abili y o he sys em, clima e change mi iga ion and
sus ainable in es men s ha a e aken in o accoun in sol ency calcula ions [13].
Ano he link be ween hese wo concep s in he insu ance indus y is he sol ency
a io ela ed o socially esponsible in es men s. Thus, companies ha a e mo e conce ned
abou hei sus ainabili y also end o ha e a s ong ocus on sol ency [
16
]. The unde lying
idea is ha he e is a ela ionship be ween he needs o he policyholde , hei u u e
sus ainabili y and sol ency.
An e olu iona y change has occu ed because, since he 1990s, egula ion o he global
insu ance indus y has e ol ed om a simple ule-based legisla ion, which measu es
sol ency in a s a ic manne [
10
], o a mo e complex isk-based legisla ion, which measu es
sol ency in a dynamic manne [
11
,
17
]. This p ocess has been encou aged by he In e -
na ional Associa ion o Insu ance Supe iso s (IAIS), [
18
,
19
], whose main objec i e is o
p o ec he igh s o policyholde s and bene icia ies om insu ance company insol ency. In
his sense, he Eu opean Commission (EC) de e mines ha adequa e co po a e go e nance
is necessa y because i leads o a mo e compe i i e and sus ainable insu e in he long
e m [20,21].
The e o e, wo egula o y models can be dis inguished (Table 2) depending on how
capi al is inco po a ed in o managemen . Some au ho s claim ha p inciple-based models
a e mo e lexible [
22
]; howe e , mos sophis ica ed models a e impe ec because hey
depend on assump ions and inpu s.
Table 2. Regula o y sol ency models. Sou ce: Own wo k.
P inciple-Based Models Rule-Based Models
De ini ion Responsibili y delega ed o
each company [17]De ailed se o ules [22]
Fea u e F eedom and lexibili y No change op ion
Capi al equi emen s and isk
managemen In eg a ed Non-in eg a ed
Nume ous au ho s ha e in es iga ed he p edic i e powe o sol ency models [
23
–
25
];
he es ablishmen o minimum capi al educes insol encies [
26
], al hough hei comple e
elimina ion is impossible [27].
Regula ion o he insu ance sec o may di e om coun y o coun y, depending on
he s uc u e and deg ee o egula o s’ isk a e sion, bu i s pu pose is he same: o a oid
bank up cy.
Sus ainabili y 2022,14, 6465 3 o 18
Re . [
28
] es ablished a heo e ical quali a i e amewo k wi h se en c i e ia o model
analysis and isk de ec ion o analyse he capaci y o a egula ion/sys em o p edic in-
sol encies. Which has been jus i ied and c i ically discussed in he li e a u e by di e en
au ho s o he insu ance ma ke . This quali a i e used by [
29
] o analyse he Eu opean
Union model. La e , [
30
] ex ended his amewo k o ele en quali a i e c i e ia in o de o
adap hem o he ma ke changes (s uc u es, isks and complexi y), which was adap ed o
he la es egula o y changes by [31,32].
The aim o his pape is o ind common p inciples o he de elopmen and con-
e gence o he wo ld’s mos impo an sol ency egula ion models, which will inc ease
inno a ion be ween di e en coun ies and he e o e an inc ease in p oduc i i y. We will
also ocus ou analysis on he o e all s uc u e o he schemes wi hou going in o he li e
and non-li e business, as mos insu ance sys ems use a comp ehensi e app oach o isk.
The selec ion c i e ion used is he olume o p emiums ma ke ed in 2018, acco ding o
he Swiss Repo 2019, which is amongs he mos ele an in he insu ance ma ke . The
coun ies selec ed o each con inen a e he Eu opean Union (EU), Uni ed S a es (US),
China, Aus alia, B azil and Sou h A ica (Figu e 1). Ame ica is di ided in o No h Ame ica
and La in Ame ica, and he Eu opean Union is conside ed a coun y because i ep esen s
95.82% o Con inen al Eu ope and has common egula ions [33].
Sus ainabili y 2022, 14, x FOR PEER REVIEW 3 o 19
Table 2. Regula o y sol ency models. Sou ce: Own wo k.
P inciple-Based Models Rule-Based Models
De ini ion Responsibili y delega ed o each
company [17] De ailed se o ules [22]
Fea u e F eedom and lexibili y No change op ion
Capi al equi emen s
and isk managemen In eg a ed Non-in eg a ed
Nume ous au ho s ha e in es iga ed he p edic i e powe o sol ency models [23–
25]; he es ablishmen o minimum capi al educes insol encies [26], al hough hei com-
ple e elimina ion is impossible [27].
Regula ion o he insu ance sec o may di e om coun y o coun y, depending on
he s uc u e and deg ee o egula o s’ isk a e sion, bu i s pu pose is he same: o a oid
bank up cy.
Re . [28] es ablished a heo e ical quali a i e amewo k wi h se en c i e ia o model
analysis and isk de ec ion o analyse he capaci y o a egula ion/sys em o p edic insol-
encies. Which has been jus i ied and c i ically discussed in he li e a u e by di e en au-
ho s o he insu ance ma ke . This quali a i e used by [29] o analyse he Eu opean Union
model. La e , [30] ex ended his amewo k o ele en quali a i e c i e ia in o de o adap
hem o he ma ke changes (s uc u es, isks and complexi y), which was adap ed o he
la es egula o y changes by [31,32].
The aim o his pape is o ind common p inciples o he de elopmen and con e -
gence o he wo ld’s mos impo an sol ency egula ion models, which will inc ease in-
no a ion be ween di e en coun ies and he e o e an inc ease in p oduc i i y. We will
also ocus ou analysis on he o e all s uc u e o he schemes wi hou going in o he li e
and non-li e business, as mos insu ance sys ems use a comp ehensi e app oach o isk.
The selec ion c i e ion used is he olume o p emiums ma ke ed in 2018, acco ding o he
Swiss Repo 2019, which is amongs he mos ele an in he insu ance ma ke . The coun-
ies selec ed o each con inen a e he Eu opean Union (EU), Uni ed S a es (US), China,
Aus alia, B azil and Sou h A ica (Figu e 1). Ame ica is di ided in o No h Ame ica and
La in Ame ica, and he Eu opean Union is conside ed a coun y because i ep esen s
95.82% o Con inen al Eu ope and has common egula ions [33].
Figu e 1. To al p emium olume e olu ion (in million dolla s). Sou ce: Da a om [33–46].
Figu e 1. To al p emium olume e olu ion (in million dolla s). Sou ce: Da a om [33–46].
His o ically, he insu ance ma ke has ocused on Sus ainable De elopmen Goal
(SDG) 3, because su i al and mo ali y modelling a e key wi hin li e and heal h business.
Wi h he incu sion o new sol ency alua ion sys ems, he ocus has been shi ing
owa ds SDG 8, which ocuses on business con inui y as well as business de elopmen , so
ha policyholde s a e p o ec ed. Ac ua ial clima e isk p icing models o loods, s o ms,
winds and i es a e cu en ly being implemen ed. These models a e aligned wi h SDG 13.
This SDG adap a ion p ocess is being de eloped ollowing IAIS guidelines [
18
], con-
duc ed h ough he Own Risk and Sol ency Assessmen (ORSA).
The assessmen equi es he inclusion o quali a i e ac o s linked o co po a e go e -
nance and decision make s [
29
,
31
]. In addi ion, clima e isk modelling is included, wi h he
aim o add essing he challenges o he u u e. Mos egula o y sys ems, howe e , add ess
sus ainabili y h ough company anspa ency and a long- e m app oach ha con ibu es
o company g ow h and co po a e go e nance [
47
]. The insu ance indus y ad oca es
managemen based on u h ul and anspa en epo ing o s akeholde s, o ien ed owa ds
a epu a ional bene i [48].
Sus ainabili y 2022,14, 6465 4 o 18
In he insu ance sec o , sol ency sys ems a e no only quan i a i e bu co po a e
go e nance leads he insu ance indus y o be sus ainable.
This wo k is s uc u ed as ollows. The second sec ion desc ibes he e olu ion and
cu en si ua ion o he i e coun ies’ sol ency models, and a bibliog aphical e iew is
p esen ed. The ele en c i e ia es ablished by [
28
,
30
] a e hen de eloped (Cummins and
Holzmülle C i e ia). The ou h sec ion uses hese c i e ia o analyse he main sol ency
models, and he i h and six h discuss he esul s and se ou he conclusions.
2. Regula o y Changes in Insu ance Sol ency: Li e a u e Re iew
2.1. Eu opean Union (Sol ency II)
The Eu opean Union is one o he mos impo an insu ance ma ke s in he wo ld
wi h a p emium olume in 2018 o USD 1.49 illion, ep esen ing 95.82% o he Eu opean
ma ke and 28.8% o he wo ld ma ke [46]
P io o he Sol ency II Di ec i e (SII) [
49
], EU coun ies used a a io-based me hodol-
ogy o de e mine sol ency so ha companies wi h di e en deg ees o isk exposu e could
ha e he same sol ency ma gin. SII p o ides o indi idualised isk managemen because
he di ec i e c ea es a global amewo k o isk managemen [
50
] and is s uc u ed on h ee
pilla s [
51
,
52
]: capi al equi emen , he moni o ing p ocess and co po a i e go e nance and
ma ke discipline. The pa adigm change es ablishes new sys ems o co po a e go e nance
ha will es ablish e ec i e managemen , wi h good con ol o decision making as well as
he quali ica ion o decision make s. In ac , he second pilla o his di ec i e ocuses on
his wo k, in eg a ing go e nance in o he day- o-day business o insu ance companies [
49
].
Addi ionally, he impo ance o adap ing o sus ainabili y by inco po a ing demog aphic
change o new en i onmen al models. Howe e , un il i was ini ia ed on 1 Janua y 2016,
i s implemen a ion was a long and slow p ocess due o he complexi y and numbe o
coun ies in ol ed [13].
SII has inc eased he need o de elop and apply new me hodologies o isk analy-
sis [
53
] and equi es he de e mina ion o sol ency capi al equi emen (SCR) and minimum
capi al equi emen (MCR), which can be calcula ed using wo me hods: s anda d o mula
o in e nal model. Acco ding o [
54
], he e a e se e al app oaches ha can be used o he
s anda d o mula ( ac o -based o mula, scena io simula ion, e c.), o guide companies
owa ds be e go e nance and hus mo e sus ainabili y.
2.2. Uni ed S a es o Ame ica
P emium olume in 2018 in he US was USD 1.47 illion, ep esen ing 92% o he
No h Ame ican ma ke and 28.29% o he wo ld ma ke [46].
The US expe ienced majo insol encies in he 1980s and 1990s, which inc eased he
in e es o supe iso s in egula ion [
55
]. S a e egula o s de eloped— h ough he Na ional
Associa ion o Insu ance Commissione s (NAIC)—a uni o m sys em composed o isk
modules ha es ablished ca ego ies in which isk was measu ed by means o isk-based
capi al models [
33
]. This model was subsequen ly imp o ed in many ways, including he
de elopmen o li e insu ance scena ios. Howe e , compa ed o o he sys ems, i ends o
sepa a e he calcula ions acco ding o whe he he line o business is claims, li e, e c.
In 2008, he Sol ency Mode nisa ion Ini ia i e (SMI) began. This egula ion has a ious
objec i es, including p o ec ing policyholde in e es s and de e mining a sol ency capi al
in line wi h he isk [
38
]; upda ing he egula o y amewo k o insu e s, which da es back
o he 1980s [
39
]; and limi ing he equency and se e i y o insu e s’ insol encies, which
a e e y cos ly o policyholde s and bene icia ies [
56
]. The SMI assesses sol ency and also
o he a eas o insu e s such as capi al equi emen s, go e nance and isk managemen ,
g oup supe ision, s a u o y accoun ing and inancial epo ing and einsu ance [
57
]. These
p ac ices and p ocesses suppo good managemen and a e pa o he inc eased impo ance
o co po a e go e nance o be de eloped in he ligh o he 2007–2013 c isis [58].
Sus ainabili y 2022,14, 6465 5 o 18
2.3. China
China’s p emium olume has p og essi ely inc eased and in 2018 was
USD 574.877 billion
,
ep esen ing 11.06% o he wo ld ma ke and placing i behind he US.
The supe iso y body is he China Insu ance Regula o y Commission (CIRC) and i s
sol ency model is he China Risk-O ien ed Sol ency Sys em (C-ROSS), he p ojec o which
began in 2012 and was implemen ed in 2016. C-ROSS is consis en wi h a s uc u e ha
equi es asse and liabili y managemen [
32
] and ocuses on h ee objec i es: quan i a i e
isk assessmen , de eloping minimum capi al and implemen ing a egula o y sys em.
The Chinese sys em ollows he guidelines o he IAIS, [
19
] and he expe ience o SII.
I is based on h ee pilla s, acco ding o i s objec i es: quan i a i e capi al equi emen s,
quali a i e supe iso y equi emen s and ma ke discipline. Go e nance is add essed in
he second and hi d pilla s. Fi s ly, by es ablishing managemen equi emen s, as well as
he e alua ion o he company and i s decision-make s. I hen add esses he obliga ion o
anspa ency o in o ma ion and epo ing o au ho i ies.
2.4. Aus alia
Aus alia’s p emium olume in 2018 was USD 79.98 million, anking i hi een h
wo ldwide wi h 1.5% o he wo ld ma ke [46].
The supe iso y and con ol body is he Aus alian P uden ial Regula ion Au ho i y
(APRA). The sol ency model was in oduced in 1973 by es ablishing he equi emen s o
access o he insu ance ma ke [
59
], and in 2013 i was upda ed wi h he Li e and Gene al
Insu ance Capi al S anda ds (LAGIC), whose aim is o s anda dize capi al equi emen s
and inc ease isk sensi i i y.
The Aus alian model is simila o SII and is based on h ee pilla s [
60
]. An insu e
is complian i i s capi al base exceeds 90% o he capi al equi emen s [
61
–
63
] and also
has app op ia e alua ion s a egies and sys ems in place. Howe e , i goes deepe in o
go e nance since i s equi emen s a e p esc ip i e, al hough he equi emen o pub-
lic in o ma ion is mo e di use. Being pa o he analysis no simply echnical bu o
managemen and go e nance.
2.5. B azil
B azil is he leade in La in Ame ica wi h 44.8% o he p emium olume and anks
six een h wo ldwide wi h 1.4% o he wo ld ma ke [46].
The supe iso y and con ol body is he Supe in endence o P i a e Insu ance (SUSEP).
This body deals wi h he minimum capi al equi emen (MCR) o access o insu ance
ac i i y, he de ini ions o he subsequen de elopmen o he sol ency egula ions and he
capi al equi emen s a e in [
64
]. Cu en legisla ion iden i ies he MCR [
55
] and he main
equi emen s o alua ion [65,66].
2.6. Sou h A ica
Sou h A ica’s p emium olume in 2018 was USD 48.269 million, anking i nine een h
wo ldwide wi h 0.9% o he wo ld ma ke [
46
]. The supe iso y and con ol body is he
Sou h A ican Rese e Bank. The egula ion go e ning sol ency is he Sol ency Assessmen
and Managemen , which began in 2010 and was implemen ed in 2018.
This egula ion complies wi h he Insu ance Co e P inciples o he IAIS [
19
], is simila
o SII and is based on h ee pilla s: i s objec i es a e o align he capi al equi emen
wi h isk, o de elop app op ia e isk models o all insu e s, o encou age he use o
mo e sophis ica ed isk moni o ing ools and o main ain inancial s abili y [
67
]. P omo es
go e nance, inc eases epo ing and p ocesses ocused on he ORSA.
3. Ma e ials and Me hods
The models a e a simpli ied ep esen a ion o eali y. An insu e ’s sol ency depends
on nume ous ac o s and all canno be measu ed [
54
]. Likewise, simple measu es can be as
e ec i e as complex ones [58].
Sus ainabili y 2022,14, 6465 6 o 18
Re . [
28
] es ablished a heo e ical amewo k wi h se en c i e ia o model analysis
and isk de ec ion and his analysis was used by [
29
]. In he ace o majo changes in
he ma ke s and in insu ance companies’ s uc u es, isks and p oduc complexi y ha e
e ol ed [
68
]. In ac , [
30
] ex ended he c i e ia o ele en and analysed he US, EU and
Swiss egula ions, ocusing on he possibili y o dynamic changes and ma ke capi al. This
model (Cummins and Holzmülle c i e ia) was subsequen ly used by [
31
,
32
] wi h he la es
egula o y changes.
These c i e ia a e:
C1: The isk-based capi al o mula should p o ide incen i es o weak companies o hold mo e capi al
and/o educe hei isk exposu e wi hou signi ican ly dis o ing insu e s’ inancial decisions.
In his app oach a ule-based model will be simple and less isk o ien ed [
29
]. The cap-
i al equi emen in a ule-based model is ob ained as a unc ion o de e mined magni udes,
such as size.
The supe iso se s minimum equi emen s ha insu e s mus mee o a oid in e -
en ion and ha a e public, which p o ides an incen i e o main ain capi al in line wi h
he isk [
29
]. The es ablishmen o se e al capi al equi emen s allows o ea ly in e en-
ion and he c ea ion o an e icien and s able s uc u e. An app op ia e sys em should
he e o e:
•Facili a e he ehabili a ion o weak insu ance companies.
•Facili a e he o de ly liquida ion o companies.
•Limi he isk o insu e s a isk o insol ency
C2: The isk-based capi al o mula should e lec he main isks a ec ing insu e s and be sensi i e o
how hese isks di e be ween insu e s.
The iden i ica ion o isk ypes and isk sensi i i y allows he de ec ion o weak
insu e s and he educ ion o a bi age possibili ies, which en ails:
•
The es ablishmen o in e nal con ols and an app op ia e go e nance s uc u e, which
can educe bank up cies because hese a e o en due o a combina ion o isks [
69
,
70
].
•
Risk sensi i i y e lec ing he di e ences be ween di e en insu e s [
30
]; howe e ,
i should no encou age disc imina ion agains small insu e s by se ing excessi e
equi emen s ha could d i e hem ou o he ma ke , he eby ha ming supply and
ma ke eedom [68].
C3: The weigh o each isk mus be p opo ional o i s impac on he o al insol ency isk. The
c i e ion is me i :
•
The egula ion p omo es a calcula ion me hod in which he majo i y o isks a e
conside ed, and hei weigh is acco ding o he impo ance in insol encies [
29
]. To
his end, isks mus be adequa ely calib a ed [
30
] and he case-by-case app oach o
each insu e mus be conside ed [28].
•
An insu e ’s insol ency p obabili y is calcula ed using a consis en isk measu e [
71
]
and he pa ame e s a e co ec ly es ima ed o a oid dis o ing he weigh o isks o
misleading capi al equi emen s [29].
•
The isk dependency s uc u e is conside ed. In his way, he co ela ions e lec he
dependencies and can e en be de eloped using in e nal models [30].
C4: The isk-based capi al sys em should ocus on iden i ying insu e s who gene a e he highes
insol ency cos s.
Insol ency o small insu e s is usually mo e equen bu la ge insu e s gene a e a
highe cos o he economy. The egula o is he e o e in e es ed in educing bank up cies
o insu e s wi h highe sys emic isk [28,29].
Insol encies in he insu ance sec o a e caused by shocks ela ed o asse s, liabili ies o
bo h [
50
]. His o ically he p edic ion o hese shocks has ocused on liabili ies because hey
a e mo e equen in weakly capi alised insu e s [69].
Sus ainabili y 2022,14, 6465 7 o 18
C5: The o mula and/o measu emen o eal capi al should e lec , whe e possible, he economic
alues o asse s and liabili ies.
An insu ance company’s balance shee can some imes be a om economic. The
calcula ion o echnical p o isions and minimum pe mi ed capi al mus he e o e be made
using he economic alue o asse s and liabili ies because book alues may p o ide biased
esul s [
30
]. The In e na ional Financial Repo ing S anda ds (IFRS) use his p inciple and
he e o e compliance wi h he c i e ion leads o con e gence wi h hem, especially in he
case o liabili ies [72,73].
C6: Whene e possible, he isk-based capi al sys em should p e en inaccu a e epo ing o loss o
ese es and o he o ms o insu e manipula ion.
The c i e ion’s ele ance is due o he accoun ing auds disco e ed in he 2008 c isis.
Supe iso y and con ol egula ions ocus on policyholde sa e y and/o ma ke e iciency,
while an accoun an mus a oid inaccu a e in o ma ion, bu wi hou neglec ing quali a i e
cha ac e is ics.
Ma ke e iciency and compe i i eness depends on pa icipan s, especially he supe -
iso , ha ing access o ele an in o ma ion. In o ma ion accu acy equi es ins umen s
ha de ec and sanc ion aud. The e o e, he sol ency egula ion should e lec he isks
and con ol hem in a easible way [
28
] and o malise co po a e go e nance o on-si e
assessmen [
30
]. In he case o insol ency, he supe iso is he e e ence agen , so sanc ions
mus be clea ly de ined and made known o he o he agen s [30].
C7: The o mula should a oid complexi y by main aining equi y in he inc eased accu acy o isk
measu emen .
This c i e ion is complex because he models mus encou age isk managemen and
educe insol ency cos s [29]. Two posi ions can be ound (Table 3).
Table 3. Main cha ac e is ics o he calcula ion o mula. Sou ce: Own wo k.
Simple Fo mula Complex Fo mula
Fa ou •Easy o explain, unde s and and use. •Imp o es p edic ion [36].
Agains
•I does no cap u e all he
in o ma ion [74].
•I does no obse e ine iciencies in
anspa ency [75].
•Cos o insu e and egula o [30].
•I is di icul o analyse [28]:
- The managemen o he company;
- E ec on capi al;
- Ma ke impac .
The balance is di icul and he insu ance indus y is complex by na u e. Howe e ,
he o mula’s le el o complexi y mus on he one hand be app op ia e and encou age
o e all isk managemen [
70
] and on he o he hand no make p emiums mo e expensi e o
educe inno a ion [
68
]. In his sense, i should be no ed ha he e may be simple o mulae
unde lying complex calcula ions [
76
] and ha inapp op ia e o mulas will wo sen ma ke
secu i y [
77
]. In e nal models a e mo e isk sensi i e and a e included in he managemen
o an insu e [
76
,
78
] bu hey a e complex and cos ly [
50
]. While complexi y is somewha
necessa y, i should be a an app op ia e le el wi h a comp ehensi e app oach o isk [
70
].
In addi ion, he in e nal models a e mo e in line wi h good go e nance.
C8: The s uc u e mus be app op ia e o economic c ises and sys emic isk. Regula ion should
an icipa e sys emic isk and p e en he insu ance indus y om being in ol ed in he economic
cycle when c ises occu .
Sys emic isk has mainly been associa ed wi h he banking sec o , bu globalisa ion has
inc eased i s impo ance in insu ance. The lack o egula ion encou ages sys emic isk [
30
],
al hough he use o he same model p o okes he same esponse o simila e en s.
In e nal models [
79
] a e a ool o sys emic isk educ ion [
80
]. These models a ise om
he e olu ion o p o i es ing ha eme ged in he 1980s [
81
]. They ela e isk o an insu e ’s
expe ience and isk p o ile and a e he basis o isk managemen and assessmen [82].
Sus ainabili y 2022,14, 6465 8 o 18
C9: The egula ion mus ca y ou an e alua ion o he managemen p ocesses and mus mainly
conside he de e minan s o he managemen capaci ies. This c i e ion equi es:
•
A s uc u e and ins umen s ha allow he egula o o de ec si ua ions and causes o
insol ency in i s ea ly s ages [
70
]. The e mus be an indica o ha p e en s he lack o
sol ency capi al.
•
Quali a i e analyses o be conduc ed which de ec hose quali a i e ac o s ha lead
o an insu e ’s insol ency—such as managemen inexpe ience, inco ec business
plans [
30
,
69
], mismanagemen o s a egic isk [
29
,
83
,
84
]—and hose ha p o ide o
i —such as in e nal con ols o expe ad ice—which can be e en mo e e ec i e han
s ic capi al equi emen s [69].
•
Regula o s o ha e supe iso y and moni o ing ools in addi ion o capi al equi e-
men s [85].
C10: Flexibili y o he s uc u e o adap o he imes. The model mus be lexible in gene al concep s
and pa ame e s. Empi ical unde s anding and heo e ical de elopmen , as models and concep s,
mus lead o he s uc u e’s imp o emen . This c i e ion analyses whe he :
•
The ma ke mo es as e han egula ion, so imbalances can a ec policyholde s [
30
].
The sus ainabili y o he egula o y egimes, mainly hose o sol ency, is hus based on
he le el o ma ke compe i ion and a sys em’s capaci y o adap o change. A sys em
ha is e y demanding in e ms o he le els o sol ency capi al equi emen can push
mo e insu e s ou o he ma ke han is necessa y [
50
], which esul s in a educ ion in
he numbe o en i ies ha make up he ma ke by changing om an a omised o a
cen alised ma ke .
•
The deg ee o ma ke compe i i eness when agen s in e e e ends o limi egula ion.
Highly egula ed ma ke s allow i ms o be highly compe i i e and each indi idual
playe has less powe [86].
C11: S eng h o isk managemen and ma ke anspa ency. Sol ency egula ion equi es insu e s
o manage isk quan i a i ely. Inc eased ma ke anspa ency ul ima ely educes he need o
egula ion.
Regula ion mus include ma ke discipline and no be limi ed o sol ency capi al. To
his end, anspa ency mus be inc eased, which p o ides in o ma ion ha allows insu e s
o be e alua ed [
50
] so hey adap o egula ion and main ain an adequa e isk le el, and so
ha he ma ke is mo e e icien and in o ma ion asymme ies a e educed.
The model mus he e o e analyse in e nal ac o s such as quali y o sui abili y o
managemen , adap ing go e nance and isk managemen [70].
4. Resul s
The egula ion o he main insu ance ma ke s is analysed (Appendix A) based on he
Cummins c i e ia se ou in he me hodology sec ion.
4.1. C1: P o ides App op ia e Incen i es
SII will no signi ican ly al e he asse s uc u e o EU insu e s wi h good c edi
a ings [
87
], al hough capi al op imisa ion will b ing hem alue [
70
] and in e nal models
may lead o egula o y a bi age and consequen ly inc eased isk [20].
B azil is e ol ing o a p inciple-based sys em and he e o e pa ially complies wi h
C1 because i includes he main isks bu does no con empla e in e nal models, while
Aus alia and Sou h A ica ha e a isk-o ien ed sys em. The US and China ha e a ule-
based app oach, al hough in bo h cases he cu en egula ions ha e imp o ed on he
p e ious ones.
The supe iso se s capi al equi emen s ha allow o ea ly in e en ion which
can p e en insol ency. In his sense, he mos de eloped sys ems a e in he EU and
Aus alia (SII), ollowed by Sou h A ica and B azil (SII o ien ed), which ha e double
capi al equi emen s. The s anda d SII o mula may no achie e all he legisla i e objec i es,
bu in e nal models allow o indi idualised isk managemen , as in Aus alia [62].
Sus ainabili y 2022,14, 6465 9 o 18
China is aligning i sel wi h C1 as he CIRC es ablishes g ea e egula ion o insu e s
wi h weak esul s. When isk is poo ly managed, i can lead o weak co po a e go e nance.
This leads o a penal y in he o m o highe capi al equi emen s. Howe e , dis o ions can
occu as in SII o isk-based capi al [
32
]. In he US, he alua ion o asse s was aligned wi h
C1 be o e he SMI came in o o ce [
30
], so he main changes a e in liabili ies. The NAIC [
88
]
de eloped an ORSA p ocess ha p o ides incen i es o insu e s who a e in line wi h C1.
4.2. C2: Risk-Sensi i e Fo mula
SII aims o ensu e ha all business insu ance isks a e aken in o accoun [
22
] and
he sys em is isk sensi i e, he s anda d o mula is simple and well-calib a ed and allows
o in e nal models [
39
,
40
]. The s anda d o mula includes he main isks (ma ke , c edi ,
unde w i ing and ope a ional) and is he e o e C2 complian , al hough unde w i ing isks
in non-li e and heal h insu ance can be e ined o inc ease isk sensi i i y [29].
RBC employs a ule-based app oach wi h de ailed calcula ion, which conside s he a -
ious isks and he ela ionship be ween hem, al hough i p esen s di icul ies in iden i ying
inancial weaknesses [
16
]. The NAIC plans o implemen a p inciple-based, isk-o ien ed
app oach ha is no as me iculous as SII, bu i can de ec weakly capi alised companies by
business line. Fu he mo e, ope a ional isk is no explici ly iden i ied [
88
], al hough i is
planned o inco po a e i .
China co e s mos isks, equi es a minimum capi al equi emen and he isk assess-
men is mo e quali a i e. B azil can imp o e on C2 because i mainly uses accoun ing
in o ma ion and does no conside disas e isk. Aus alia s esses isks such as mo ali y
and mo bidi y o assess disas e isk.
Ope a ional isk is complex o assess quan i a i ely [
29
], bu quali a i e equi emen s
can be used [
20
]. Aus alia de o es legisla ion o his isk [
63
], he EU and Sou h A ica
se quali a i e equi emen s, bu quan i a i e equi emen s could be imp o ed, and B azil
uses a p emium-based o mula.
A e he 2008 c isis, liquidi y isk has become ele an . Howe e , many models, such
as he Aus alian o B azilian model, do no men ion i [63].
The Chinese C-ROSS is C2 complian , as i conside s mos o he impo an isks,
al hough some isks (ope a ional, s a egic, epu a ional o liquidi y) a e add essed in a
quali a i e way [
32
], which can be imp o ed. The sys em o ces he use o he s anda d
o mula and limi s pa ame e s and scena ios.
4.3. C3: Well-Calib a ed Fo mula
Eu opean Union, Aus alia, B azil and Sou h A ica conside he dependence be ween
isks and some sub- isks by means o co ela ions, so i complies wi h C3.
The isk measu emen is ca ied ou using a isk measu e. The EU, Aus alia, Sou h
A ica and China use VaR wi h a 99.5% con idence le el, al hough in he la e ma ke i is
only o ca as ophic isks. The US isk-based capi al and B azil use he same isk measu e
wi h a 99% con idence le el [89].
Risk-based capi al was no e ec i e in iden i ying weaknesses in he pas . The SMI
imp o es he adequacy and isk weigh ing, bu since he NAIC has no au ho i y o imple-
men me hods o pa ame e s, because i can only make sugges ions bu no en o ce hei
implemen a ion [88], he e is oom o imp o emen in C3.
C-ROSS de e mines capi al equi emen s by using sol ency a ios and agg ega ing
hem by means o a co ela ion ma ix. I also conside s he dependence be ween insu e s
by classi ying hem. These would all be in line wi h C3 [
32
]; howe e , he a ios do no
ully cap u e capi al needs [30].
4.4. C4: Iden i ica ion o High Insol ency Cos s
All sys ems excep China and he US a e p inciple-based sys ems and calcula e capi al
equi emen s using VaR, which inc eases isk o ien a ion [89].
Sus ainabili y 2022,14, 6465 16 o 18
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