Abstract
It is a well-known fact that heterogeneity is one of the characteristics of the insurance market, and it is relevant to classify and characterize companies by means of their financial properties and different risk profiles. So, it may not be adequate to use a general model for all the companies operating in the European market, as the one proposed by the Directive 2009/138/CE. Solvency II is a general regulatory model such that the volume of own resources will be determined depending on risks based on a calibration reached considering the average behaviour of companies. In order to criticize this approach, we have obtained a characterization of the profiles of companies using a PAM clustering methodology, adapted for longitudinal data, and we have studied the evolution of the obtained groups of companies under a Bayesian approach. In this way, we have introduced a multinomial general dynamic linear model to study the probabilities of the companies to be included into each group. The characterization and identification of these groups suggest that an unique regulatory model may be unsuitable. We have used data from DGSFP (Spanish insurance regulator), with public information about the balance sheets and income statements from years 1999 to 2011.
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Notes
European Commission, Internal Market D.G. (2003): Solvency II—Reflections on the general outline of a framework directive and mandates for further technical work. MARKT/2509/03. Brussels, 3 March 2003.
Point (26) of the Preface expresses that “...The Solvency Capital Requirement standard formula is intended to reflect the risk profile of most insurance and reinsurance undertakings. However, there may be some cases where the standardized approach does not adequately reflect the very specific risk profile of an undertaking”.
This Article says: “Where it is inappropriate to calculate the Solvency Capital Requirement in accordance with the standard formula, as set out in Sect. 2, because the risk profile of the insurance or reinsurance undertaking concerned deviates significantly from the assumptions underlying the standard formula calculation, the supervisory authorities may, by means of a decision stating the reasons, require the undertaking concerned to replace a subset of the parameters used in the standard formula calculation by parameters specific to that undertaking when calculating the life, non-life and health underwriting risk modules, as set out in Article 104(7)”.
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The authors would like to thank the referees for all their helpful comments that have greatly improved the paper.
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Annex I: Estimation of the multinomial state space model
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Albarrán, I., Alonso-González, P. & Marin, J.M. Some criticism to a general model in Solvency II: an explanation from a clustering point of view. Empir Econ 52, 1289–1308 (2017). https://doi.org/10.1007/s00181-016-1107-3
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DOI: https://doi.org/10.1007/s00181-016-1107-3