DEPARTMENT OF ECONOMICS

Uppsala University

Economics D/Thesis

Spring 2011

Solvency II: The Change of Insurance

Regulation and Its Projected Impact on the

Social Welfare

Author: Henrik Hoppendorff

Supervisor: Mikael Bask

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Abstract

The global financial industry is facing regulation acts after the financial crisis hit the world

economy in 2008. The insurance industry is playing an important role on the global financial

economy where it is possible to finance and pay the losses that occur from different

catastrophes. The European regulators have created a new insurance regulation directive,

Solvency II, which goes live 1st of January 2013. Solvency II will have a wide impact on the

European and whole global insurance industry. The regulation of the insurance market has

both positive and negative outcomes. This paper studies what is the projected impact of the

insurance regulation Solvency II on the social welfare. To evaluate the cost and utility of the

regulation requires understanding the principles and complexity of insurance markets and

insurance programs. This includes also captives, self-insurers, which play an important part

on insurance industry and risk management. Outcome of the study is that the increased

regulation and supervisory lead to more harmonised industry which though favours larger

companies. The costs of implementation of Solvency II might outweigh the benefits of

regulation in the short term, but in the long term the utility is expected to outweigh the costs.

The increased utility and social welfare are achieved if the regulation is implemented

correctly.

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CONTENTS:

Section 1: Intro 4

Section 2: Insurance industry 5

Basics of insurance industry 5

Distribution of insurance 6

Insuring different types of risks 7

Common problems on insurance market 9

Insurance cycle 11

Reinsurance 11

Section 3: Regulation 13

Why the regulation exists on insurance industry? 13

Separation equilibrium on competitive insurance markets 15

Alternative form of insurance – Captive 16

Section 4: Study 18

The new insurance regulation - Solvency II 20

Premium levels 23

Supply of insurance products and behaviour of different lines of insurance business 24

Captive market and structure of insurance programs 25

Employment, organisations and competition on insurance market 27

Section 5: Conclusions 30

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Section 1: Intro

The financial services industry is facing consolidation and restructuring worldwide.

Competition and the economic performance of the financial industry are affected by

these changes in the whole industry (Choi et al. 2005). In the financial industry the

insurance is playing an important role for the society by diversifying risks for

catastrophes but also investing large amounts on global capital markets. European

insurers generates over 1050 billion euro (EUR) premium income and invests around

6 800 bn EUR where approximately 30 % was invested in shares. Insurance is not

only having an important role on capital markets but it also employs around one

million people in European insurance industry (CEA Statistics N°42 European

Insurance in Figures -report).1 In Sweden the premium income amounts nearly 250 bn

Swedish krona (SEK). 37 % were invested in bonds, 53 % in equities and 10 % other.

Swedish insurance industry employs over 20 000 people (Svensk försäkring i siffror

2010 –report from Försäkringsförbundet).

Ayadi & O’Brien (2006) states that managing the risks with financial institutions is

essential in ensuring the resilience of the financial system. Regulation authorities look

after the sustainability of financial system by regulation acts. During the last years a

new insurance regulation directive, Solvency II, has been designed and it is supposed

to go live 1st of January 2013. The scope of regulation act is very wide and the

directive has a large impact on whole insurance industry. Because of large, diversified

and complexity of insurance industry the authorities way for more sustainable

insurance market is not an easy mission. The challenges are to implement Solvency II

requirements for every insurance company because of the heterogenic companies,

complexity and variety of risks. It is though an interesting subject to focus at as the

projected impact of regulation is still uncertain and directives amendments are yet to

come. Getting better understanding of the regulation, and the structure of the

directive, helps to understand the means of authorities that should be to provide a

more sustainable financial system. It helps to valuate the cost and utility of Solvency

II and its impact on the social welfare, which is the main purpose of this study.

1 Figures are provisional and represent more than 90 % of the market.

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The focus is on different powers between the society and insurance market which are

premium levels, supply of insurance products and the behaviour of different lines of

insurance business, captive market and structure of insurance programs, employment,

organisational structure and competition on industry. The study is a qualitative study,

which is based on insurance literature and interviews with insurance specialists.

Section 2: Insurance industry

This section describes basics of insurance industry. It covers the principals of

insurance industry, different market actors and theories related to insurance market,

insurance cycles and the function of reinsurance.

Basics of insurance industry

There are three kinds of insurance business that a traditional insurance company

usually operate with; insurance against loss, life insurance and pension insurance.

Insurance companies manage the risk against the uncertainty of the future. In essence,

all the participants have need to control their risk exposure. Basic method to manage

the risk is risk pooling where the risk is diversified between many market actors. The

risk reduction obtained through pooling the risk is called diversification. When a large

enough amount of unrelated risks are pooled the law of large numbers becomes valid.

This means that when a large amount is present the expected value can be calculated

with a high probability because the average of a large number of independent

measurements tends toward the theoretical average of that quantity. The greater the

number is present the more accurate and reliable prediction can be made. This means

less deviation of the actual losses from the expected losses. Based on this the

insurance company with large enough quantity of risks in its portfolio is able to

provide an insurance on a price that is only a fractional part of the value of the house

burned down (Hörngren et al., pages 11–25).

Insurance relations are subject to imperfect information. Insurance taker has better

information than the insurer about those risks that insurance taker is subject to. This is

called asymmetric information. The insurance company faces also a problem to

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control the behaviour of insured party after signing the insurance contract. The

problem with the change towards riskier behaviour from the insured is called moral

hazard (Hörngren et al., page 15). Due to the change in behaviour it is reasonable to

assume that the fire damages more often an insured object than uninsured object

(Hörngren et al., pages 94- 96).

The insured has to bear a part of the risk through some form of deductible. There are

two ways to do this; fixed deductible or proportional deductible that is predefined

share of the loss. Deductibles in general are in the interest of both parties to reduce

misuse of the insurance. Moral hazard can be reduced even with a bonus system,

which motivates to have a better control over insured assets. The bonus system

rewards those who have no claims during the policy year and rewards them by

reduction in premium for the next policy year. This means that the cost of information

can be decreased using the right deductible alternative (Hörngren et al., pages 94- 96).

Distribution of insurance

There are different ways to distribute the insurance to customers. Insurance broker, a

third party, is often involved in more complex insurance contracts. The purpose of

involving the broker is to use the broker to reveal the hidden information that the

insured and insurer might have. The broker can provide special information about

insurance takers risks to the insurer but also to provide information about the insurer’s

solvency to the insurance taker. The problem with asymmetric information is

decreased when there is a specialised party to negotiate the contract between insured

and insurer. Distribution of insurance in different ways varies depending of the costs

and barriers to entry. Independent agents or brokers can be used and they are most

commonly used in complex lines of insurance such as liability insurance. Alternative

is to write the insurance on direct basis, which means that no third party is used.

Those who write direct business are relying more on advertising and automation in

distributing the insurance. If the market is dominated of the direct writers, meaning

that brokers are not involved, the entry barriers are considered to be high. Insurance

studies have shown that the independent agency system has higher cost than direct

writing (Choi et al. 2005, page 645).

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Insuring different types of risks

People demand services to manage risks through their life cycle. From the individual,

household and company perspective these risks can be categorized into human

capital, real assets and savings and financial assets.

Human capital risks mean illness or accident that can affect to earnings capability.

Also other risks like variations in business cycle or demand in labour and productions

technique can lead to a job change or longstanding unemployment. Though, it is very

difficult to insure the human capital and that’s why the society guarantees a certain

quality of living to its citizens through social security, which is financed with taxes

collected from the society. The social security functions as an insurance that nobody

falls below certain standards of living. The social security with tax finance is though

vulnerable for a free rider problem when the social security level is set too high. The

problem with adverse selection is also present in human capital risks when people

with more risk are insuring themselves more often than healthy people. This leads to

selection bias because the premium that has to cover the average costs tend to be

higher when less risky people are not willing to pay the same premium as riskier

people and refuse to insure them selves (Hörngren et al., pages 47-55).

Selection bias problem can be discouraged through offering different deductible

alternatives in policy letter. High-risk party chooses a low deductible level and reveals

though special information which otherwise would be unknown to the insurer. Low-

risk party naturally chooses higher deductible, as he knows that a loss occurs very

seldom. High deductible level affects to insurance premium, the price that insured

pays for the insurance, by lowering premium level. In economics an initiative taken

by a party with more information to reveal its preferences and hidden information is

called signaling. For instance, in a case of car insurance the driver signals his risk

level by choosing the deductible level and the cover of his car insurance. A good

driver prefers high deductible level and might exclude some special covers for car

insurance as he knows his driving skills. A bad driver chooses low deductible level

and is ready to pay more premium to get lower deductible, as he is uncertain of his

driving skills and the probability of an accident. When the initiative is taken by a less

informed party it is called screening. In the case of insurance, the insurance company

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screens by offering different categories of insurance contracts and coverage and

knows the risk level of customer by letting the insured choose the right cover for

himself (Hörngren et al., page 97).

The second category, risk in real assets, means risks that are subject to for example

real estate, cars, furniture and other inventories. Real assets can be insured as

discussed earlier by applying the law of large numbers. Customers willing to insure

real assets are able to insure them on a very low premium levels. Information cost is

lower when real assets are insured through bilateral contract where no third party is

needed because insurance company can achieve necessary information directly from

the insured (Hörngren et al., pages 60-61).

Even companies care about their risk exposure and handle it through specialised,

financial and insurance companies (Hörngren et al., page 49). Hörngren et al. states

that a company with a big individual owner or some major owners are naturally

interested to insure the company’s assets and diversify risk exposure. Hörngren et al.

continue the theoretical approach of insuring risks by stating that when it comes to a

large public listed company that has a well-diversified structure of ownership it is less

interesting from the shareholders side to insure company’s assets. By paying an

insurance premium can affect negatively in the company’s real capital because it is a

cost that the company has to pay if it wants to have insurance. Through a well-

diversified investment portfolio shareholders can diversify their risks and they are not

in need to insure the assets of one company where a small portion of their total assets

are invested.

One of the real reasons why even a larger company decides to insure its assets is that

there are other interests in the company than shareholders. These are for instance

employees and financial companies that see the insurance as a warranty. The

employees are not able to diversify away their risks due the possible damage in the

company because they have invested to the knowledge that might not be as valuable

outside the company. The company without insurance has more difficult to recruit a

competent people who would be willing to specialize in a job function that could give

a small return outside company if the possible damage occurs and company is unable

to continue its business. Even interests from financial companies or institutes that

borrow money to the company demand that company is properly insured. They want

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to make sure that the company is able to pay back if the damage occurs. By insuring

the assets the company can decrease its cost for external finance (Hörngren et al.,

pages 62-63).

In third risk category, risks in savings and financial assets, the risks can be diversified

through pooling the savings through different alternatives on financial markets that

the financial system offers. To manage these risks there exist specialised financial

service companies who provide capital allocation and risk management services

through pooling the risks efficiently keeping transaction costs low (Hörngren et al.,

pages 68-69).

Common problems on insurance market

Insurance market faces various problems that are common in the industry and make it

desirable to regulate and supervise the market. The most common and central

problems are clarified in this part of the thesis.

Asymmetric information, moral hazard, risk aversion, ambiguity and agency

problems are some of these problems. Asymmetric information and moral hazard

have been mentioned earlier in the text but risk-aversion, ambiguity and agency

problems will be clarified next.

Regulation of insurance market and government intervention are desirable due to risk-

aversion of individuals. Risk-aversion means that individual prefers not to take a risk.

Individuals underestimate future and uncertainty as they think that nothing is going to

happen to them. Individuals may be myopic or discount the future too heavily or

judged to have ‘excessive’ risk aversion. Because of that they won’t insure

themselves if they are not appreciating insurance enough. As they don’t appreciate

insurance enough they are not willing to pay for insurance because they think the cost

is too high.

The ambiguity is present in the industry due to the lack of information about the

contract, the risks and the ability of the insurer to fulfil the terms of the contract. The

agency problem is present because of different interests, knowledge and decision

making abilities that shareholders, managers and policyholders have. Shareholders

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demand certain return on their investment but don’t have always the same level of

information that managers of the company have. Management demand increased

profitability and managers together with insurance sellers might have other incentives

like bonuses to write the business to increase income. This will though be seen

increasing share of claims if the business they write is bad. It might take several years

before shareholders acknowledge the quality of customers and correct premium

pricing. Policy holders also have their demands like for example decreased premium

or increased coverage for their insurance. Agency problem may mean that the

interests of one or more parties are not properly represented (Ayadi et al. 2006, pages

35-36).

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Insurance cycle

The insurance cycle is the business cycle, which determines in which state the market

in the insurance industry is. It can be said to determine the stability of the industry.

When the market is soft the insurance premiums are low and the profits are shrinking.

The hard market is opposite of soft market and recognized from high premium levels

and increasing profits. Soft market turns to hard market when the capital base of the

company is decreased so much that company has to increase premium levels. This can

happen due to a catastrophic event or several catastrophic events that drive premium

levels higher (Karl-Ove Andersson, interview 12th May 2011).

Reinsurance

Financial intermediaries that supply services to individuals and companies have also

need to manage their own risk exposure. It is unrealistic to fully pool the risks. For the

first, the insurance companies might specialize through geographical concentration.

When an insurance company insures risks that are connected to each other through the

geographical concentration the insurance company is violating the law of large

numbers. A flood, earthquake or storm exposes the insurer to be vulnerable to

extreme losses. For the second, some catastrophes are too large to be insured by only

one insurance company. Even some normal risks can be too large for some smaller

insurance companies. To insure a large risk that is not subject to a law of large

numbers and the size of the insurer is large enough is neither acceptable from

insured’s, owner’s or probably either society’s point of view. Increasing the buffer

capital would increase the price of insurance, which is not desirable. This has created

a need for reinsurance (Hörngren et al., page 104).

Ayadi (2006) describes that the key components of risk are volatility, uncertainty and

extreme events. Volatility can be described as random fluctuations in either the

frequency or severity of a contingent event. Uncertainty is the risk, which the models

used to estimate the claims, failing to produce a reliable data because models are not

perfect. Extreme-events are high-impact and low-frequency events. Specifying a loss

value and a sufficient amount of capital that insurer needs to hold to cover losses in

extreme-events is difficult because they are adverse tail of the probability distribution

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and are not adequately represented by extrapolation from common events (Ayadi et

al. 2006, pages 22-23).

To reduce these risk components (volatility, uncertainty and extreme-event) insurance

companies are using reinsurance. This makes it possible for insurer to retain less

capital on balance sheet to cover extreme losses as major risks are transferred to

reinsurers. Reinsurance can serve as an equity substitute, which provides additional

underwriting capacity for the insurer. Reinsurance reduces the fluctuation in the

business performance of the insurer. The reduced probability of insurers to become

insolvent enhances the stability of the insurance system. Though, the presence of a

reinsurance contracts is increasing the risk for counter-party defaults. Reinsurer’s

bankruptcies may occur but they are rare (Ayadi et al. 2006, page 31).

Trading with risks creates further conditions to manage risks through risk distribution.

It is worth to note that the risk distribution is not the same as risk diversification (risk

pooling) because risk distribution does not affect the risks that parties together must

retain. When the risk is distributed it means that the owner of the risk, the one who

calculates the risk in to his liabilities, changes. Risks that are too large or risky and do

not fit in to one insurer’s appetite can be sold to another insurer who has appetite for

them and is able to insure them. This leads to a situation where the parties that are

able to retain more risk take over risks from other parties. Differences in preferences

of parties give origin to trade between parties (Hörngren et al., page 31).

One sort of risk trading is reinsurance market where insurance companies transfer

parts of the non-diversifiable risks to other (re)insurance companies. Redistribution of

risk leads to a better security for both, the insurance taker and the insurer.

Reinsurance doesn’t differentiate a lot from traditional risk pooling (risk distribution)

but the primary difference is the size of the risks and that insurance companies are the

trading parties (Hörngren et al., page 105).

Trading with risks can be complex and include increased costs from time and

resources devoted to negotiate between trading parties. The policy wordings are

negotiated and contracts are made for both parties to make sure they understand and

follow policy wordings. Existence of asymmetric information affects to complexity to

manage contracts (Hörngren et al., pages 31-32). Reinsurance market is affected also

by negative selection bias and moral hazard but these problems should be manageable

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in the market where the market actors are professionals and specialised on risks and

risk management. The desire to keep reinsurance market sustainable should also limit

insurance companies to under price risks which they are selling to reinsurance market

(Hörngren et al., page 106).

Section 3: Regulation

This section of the thesis is about the regulation of insurance industry. The regulation

is needed to avoid bankruptcies and prevent under pricing that can be an effect from

the competition between insurance companies. The regulation of the market can be

done through capital requirements, which should have a first-best choice in

supervising the insurance companies. This is so if the regulation and supervisory

increases risk aversive behaviour among insurance companies. This could mean for

example decreased problems with moral hazard and asymmetric information. The

outline of the section is following. First, the reasons for regulating insurance industry

are described. Second, the theory of separation equilibrium on competitive insurance

markets is introduced to give a short description of a competitive insurance markets.

Third, the outcome of the separation equilibrium is explained, meaning captives (self-

insurance), where some companies have found an alternative way beside the

traditional insurance program.

Why the regulation exists on insurance industry?

Insurance industry has experienced a steady growth, which can be assumed to

continue as a result of the public reforms that are encouraging an ageing population to

allocate increasing proportion of their savings to the insurance industry. European

Central Bank stated in 2005 that insurance companies manage more than a quarter of

all household financial wealth in the euro area. Managing the risks with financial

institutions is essential in ensuring the resilience of the financial system (Ayadi et al.,

page 90).

Future and uncertainty makes insurance industry to be vulnerable for future claims

depending their occurrence, amount and timing. This has led the insurance industry to

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be subject to a substantial degree of regulation (Ayadi et al. 2006, page 35). The

essential function of an insurer is to manage its risks so that it is able to meet its

commitments to policyholders and beneficiaries. Insurer’s capability to meet its

commitments is known as solvency (Insurance Solvency Supervision: OECD Country

Profiles, 2002, page 7).

Munch et al. (1980) states that the foundation for regulation is to protect the interests

of policy holders, third-party liability claimant and generally other actors on the

market. Munch et al. found that insolvent firms are likely to be holding-company

affiliates, which can be an indication of preference for higher risk and ease of

withdrawing capital. Insolvent firms have also recently had management change and

this can indicate high cost of capital. At last, companies that have become insolvent

have been relatively small and had a relatively small stock of intangible assets.

Insurance company has a role as financial intermediary that mobilise savings from

households and firms and finance investments in the corporate sector (Ayadi et al.,

page 90). Insurance company takes in premiums in advance before paying out any

benefits in respect of claims, which means that the insurance business is characterized

by a reversal of the conventional operating cycle (Insurance Solvency Supervision:

OECD Country Profiles, 2002, page 7). The moment when clients pay premiums is

very distant from the moment when insurers possibly have to pay out compensation.

The insurer does not know upfront if the premium will be sufficient and clients have

to trust the insurer will meet its future obligations. An insurance company may have

an incentive to set a premium that is too low (under-pricing) to be economically

viable. To gain market share with too low premium levels could harm policyholders.

The client has to estimate the current (financial) solvency of an insurer and also the

willingness of the insurer to stay solvent over time, which is even harder to estimate.

The trust from the consumers can be said to be the most important foundation of a

financial institution (Doff 2007, page 18).

This complexity of the insurance industry makes it difficult for policyholders or

beneficiaries themselves to supervise their insurer’s solvency. Thus the supervisor

must be an institution. This supervisory protects consumers and beneficiaries by

guaranteeing solvency of insurance companies, which enhance public confidence

(Insurance Solvency Supervision: OECD Country Profiles, 2002, page 7).

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Various problems in insurance make it desirable to regulate and supervise the

industry. These are asymmetric information, moral hazard, risk aversion, ambiguity

and agency problems, which have already been mentioned in the text earlier.

Regulators intervene because the interests of one or more parties are not properly

represented. Insurance industry may face also other moral hazard problems like the

bonus or other sales incentives that insurance salesmen may have which leads them to

act in their own interest and not in that of less knowledgeable policyholders (Ayadi et

al. 2006, pages 35-36).

Butsic (1994) states that if the markets were efficient there would be no need for

solvency regulation because consumers would know the likelihood of their insurer’s

becoming insolvent, with the price of the policy being adjusted to reflect the

expectation that not all claims would be fully paid. Insurers could adjust their capital

levels to reflect their customers’ preferences for more or less protection at higher and

lower prices. In the real world solvency regulation exists despite the availability of

considerable public information regarding the financial strength of insurers and a

strong demand for solvency. According to Butsic the regulators have determined that

solvency protection is desirable (Butsic 1994).

Competitive insurance markets and separation equilibrium theory

This section describes competitive insurance markets with imperfect information,

which in some cases has lead to an alternative way, by building self-insurance

companies, to insure assets. This alternative way to insure assets is defined in the next

part of this section of the thesis. The theory of Rothschild and Stiglitz about the

insurance market is part of this section.

Rothschild and Stiglitz set an imperfect information model in competitive insurance

markets where two kinds of individuals exist; one with the low-risk and one with the

high-risk. Individuals know their own level of risk but insurer is unknown of this. In

their model free entry and perfect competition ensures that policies bought in

competitive equilibrium make zero expected profits. As both types of individuals pay

same price for insurance this will lead to a situation where individuals with low-risk

do not choose to buy insurance. Otherwise there would be a welfare transfer from

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low-risk individuals to high-risk individuals. This means that the pooling equilibrium

cannot exist and there has to be a separating equilibrium. Insurers offer though

insurance for two different prices were low-risk individuals pay less than high-risk

individuals. High-risk individuals are not allowed to purchase insurance for the same

price with low risk individuals, which mean that competitive insurance markets have

no equilibrium (Rothschild and Stiglitz, 1976).

Alternative form of insurance - Captive

Captive, also known as self-insurance, is an insurance company that is owned by its

parent and its function is to insure all or parts of the risks of its parent. Captive is

expected to meet the financial criteria to which normal insurers are expected to

adhere. The captive has been argued to be an important part of the risk-management

process contributing to an effective risk-financing programme. Captive must ensure

that the business it is writing is profitable by closely linking to the risk-management

capability of the parent company. The captive owners have to maintain a good loss

history that losses could not seriously harm its financial base or affect the cost of the

reinsurance protection. Risk management, loss prevention and control measures can

therefore not be divorced from the captive insurance company concept (Bawcutt

1997, pages 1-3).

Because of asymmetric information on insurance market there exists a clear incentive

for a class of customers to separate out of the crowd of insurance buyers. This can be

done through reducing a level of loss sharing, or increasing the utility for the

insurance premium it pays, which increases its welfare. This can be achieved by

forming a captive. By forming a captive the insurer decreases the cost of information.

The captive transfers the risk through reinsurance and provides information of the

probability distribution of losses of its parent at no, or at least very low, cost of

information. This gives the parent company an opportunity to purchase the acceptable

amount of insurance at a fair rate. Captive can be used as a device that enables

insurance markets to get the relevant information about the insurance-buying

company at a reasonable cost. Parent companies also achieve a fairer rate at

reinsurance market through captives than what the direct commercial market offers

(Alahassane et al. 1989).

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A combination of self-insurance and traditional insurance exposes the insured

partially to risk, which can be considered a means of control moral hazard (Faure &

Hartlief 2003, page 146). Alahassane et al. states that by forming a captive

corporations attempt to reduce the effective level of loss sharing thrust upon

companies in the direct insurance market. The distribution of losses is readily

apparent to the managers of the insured companies and though asymmetric

information is not a problem in case of captives as it normally is for commercial

insurance companies (Alahassane et al. 1989).

According to Karl-Ove Andersson (Head of Captive Operations in the Nordic, Marsh

Management Services Ab) there are following reasons to establish a captive:

- Decreasing the cost of access to reinsurance market.

- Possibility to retain a higher deductible level on a concern level.

- Incitement to prevent losses with a better control of risk (moral hazard), better risk management culture.

- Financial aspects for the company (untaxed reserves, low income tax, cash flow benefits).

- Pressure on the traditional insurance market; when the company shows curiosity to build a captive the insurance market reacts often more positively to company’s demands what becomes to the insurance programme.

- Meeting the needs that company has to insure for example specific risks or to have better terms and conditions than what traditional insurance market can offer. The traditional insurance market does not offer insurance or has not the right terms and conditions compared to the premium that the company pays.

When the insurance premiums are low the incitement to build a captive and use it is

low. When the premium levels are low the utility that captive generates to the

company decrease because less money is flowing into captives. The idea is to collect

and keep as much money as possible in the captive on a right risk exposure. Captive

market, calculated on the basis of money going into captives, in Sweden can be

assumed to be approximately 2 billion Swedish krona and around half of this might

flow through captives back to the reinsurance market (Andersson).

Establishment of captives can function as a signal that a firm has a low risk. To use

this signal the high risk companies might also have interests to establish a captive.

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Start-up costs might though prevent high risk firm’s interest for this kind of

signalling. When the parent company is establishing a captive it requires some costs

for the parent company, like monetary expenses and time from the management.

Before deciding to build a captive or not there has to be an evaluation if it is

economically sound. These initial set-up costs may dampen the incentive for false-

signalling (Alahassane et al. 1989).

Section 4: Study

The fourth section examines the impact of insurance regulation (Solvency II) on the

social welfare. Dispositions of this section is following; the approach and purpose of

the study, limitations, theoretical background of Solvency II and regulation, results

from previous studies that are relevant for the insurance regulation and interviews

from different actors of insurance market.

Approach for this study is a qualitative study where theoretical background combined

with interviews from different actors of insurance market is giving information to

fulfil the purpose of this thesis. The purpose of this study is to evaluate the cost and

utility of the regulation in general and to draw a conclusion of the projected impact on

the social welfare. Studying if the increased regulation and supervisory of insurance

market leads to a positive outcome with reasonable increase of costs or if it results in

less utility than expected. Focus is on different powers between the society and

insurance market which are premium levels, supply of insurance products and the

behaviour of different lines of insurance business, captive market and structure of

insurance programs, employment, organisational structure and competition on

industry. Solvency II regulation is very large and extends on a wide area of insurance.

The purpose of this study is not to give a deep understanding of Solvency II but only

to introduce the new regulation. This study and results concentrates mainly on the

Swedish market but not excluding the effects on the European level as the new

regulation covers whole European Economic Area.

The decision to interview following people was made based on their market

knowledge and the part of insurance industry or society their company or institution is

representing. Daniel Barr represents the Swedish National Debt Office (Riksgälden)

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and leads the investigations about the Solvency II directive and it’s implementation to

the Swedish legislation and system. Daniel’s knowledge about the Swedish

economical system is highly appreciated and supports purpose of this study to get an

overview of the becoming regulation. Bertil Sjöö represents Supervisory Authority

(Finansinspektionen). Bertil’s experience and background at the supervisory authority

is for a great support for the purpose of this study. Karl-Ove Andersson with his

expertise gives an insight to the development of captive market under new insurance

regulation. Captive market has an important role for risk management and increasing

share of the global insurance market. Staffan Hansén, representing a life insurance

company, SPP, gives valuable information on how an insurance company is preparing

to the new regulation and what kind of effect it has on the organization and life-

insurance products that are offered to consumers.

Interviewed people:

Daniel Barr is Head of Bank Support Department at the Swedish National Debt

Office (Riksgälden). Previously Daniel has hold positions as Chief Economist at the

Swedish Pensions Agency (PPM) and Chief Analyst at AP7 (Sjunde AP-fonden).

Interviewed on Monday 9th May 2011 in Stockholm.

Bertil Sjöö is Deputy Insurance and Investment Funds Department Director at

Finansinspektionen, 17 years long career at Finansinpektionen. Interviewed on

Thursday 19th May 2011 in Stockholm.

Karl-Ove Andersson is Head of Captive Operations in the Nordic, Marsh

Management Services Ab, Marsh is the world's leading insurance broker and risk

adviser. Interviewed on Thursday 12th May 2011 in Stockholm.

Staffan Hansén is Chief Investment Officer, SPP, Sweden. SPP is one of the leading

life-insurance companies in Sweden. Interviewed on Friday 27th May 2011 in

Stockholm.

20

The new insurance regulation - Solvency II

“The main reason why crises occur is not lack of statistics but the failure to interpret

them correctly and to take remedial action.”

Claudio Borio

Deputy Head of the Monetary and Economic Department, and,

Director of Research and Statistics, Bank for International Settlements (BIS)

(The Economist, Jan 15th 2011)

Overall the main objective with the Solvency II regulation is to further harmonize the

European insurance market to ensure that similar competition opportunities are

formed between insurance companies everywhere in the European economic area.

Solvency II aims to implement improved capital adequacy requirements and risk

management standards. Other main purposes with the regulation are the protection of

policyholders and stabilizing the financial system (Kommitédirektiv).

The Solvency II is wide and includes several different parts. Regulation is carried out

in a way that the insurance company is given an incitement to calculate and manage

its risks on a suitable way. It should create forward looking and risk orientated

regulation that is based on operation of the insurance company (Kommitédirektiv).

Solvency II has a three-pillar structure where the first pillar focuses on capital

requirements that arise from quantifiable risk categories. It defines the capital

resources that are needed in order to absorb unforeseen losses and to maintain the

financial stability of the company. The second pillar focuses on the qualitative aspects

of risk management systems, governance and supervision. One of the requirements is

that the insurer should conduct on an Own Risk and Solvency Assessment (ORSA).

This means that the insurer will judge it’s own risk and solvency levels and

communicates about them to the supervisor. It will be necessary to identify, measure

and manage risks proactively. The third pillar focuses at disclosure and transparency.

Third pillar enhances market discipline by making the insurers public disclosure of

information more transparent to the general public and other stakeholders. Insurers

are required to publish information that is relevant to their capital adequacy, but also

21

an annual report on their solvency and financial condition (Lechkar et al. 2009, pages

10, 18-19).

Lechkar et al. (2009) notes that among companies there is a need for higher awareness

of the relations between risks, capital requirements and earnings. This means that the

management of the insurer takes all three aspects into account when making business

decisions.

The Solvency II should “secure the welfare” through the risk reduction which results

from increased regulation and supervisory. One of the incitements for regulating

insurance market is to enable more efficient management of capital. There are two

different types of regulation models to do this. The first one is a quantitative based

model that can be used when the purpose is for example to regulate insurance

companies capital invested in different assets. Part of the insurance company’s

business is to invest the capital, which it collects in advance as premiums from

insurance takers. To regulate proportions of capital invested in different investment

alternatives with different levels of risk is part of the insurance regulation and

quantitative model is suitable for this. The second model is qualitative based which is

used to control the operations of the insurance company. Regulation that relies on

qualitative principles is more flexible and process orientated due to rules that are

separately decided for every financial institution based on its risk situation. Though,

this kind of model demands more supervising which means more documentation and

openness for the insurance company (Kommitédirektiv).

Doff (2007) states that more enhanced risk awareness in the insurance industry results

in more efficient capital allocation meaning that capital should be allocated to the

areas where risks are. The solvency requirement is linked to the risk profile and the

risks are likely to have a clearer price. For insurance firms capital allocation should

work as an incentive to manage the risks profile and risk should actively steer their

business. The whole insurance industry benefits when the whole system is more stable

(Doff 2007, page 140).

Lechkar et al. (2009) remarks that financial supervision will not be adequate in case

the insurance groups are supervised on legal entity basis only. To make sure that

financial stability on the European level is managed in an efficient way, the economic

reality of cross-border financial institutions must be taken into account. The

22

supervision of cross-border institutions is at the moment mainly organised nationally

and on legal entity basis where it is legal entity supervisors who decide on key issues

(Lechkar et al. 2009, pages 11-12). Solvency II harmonises supervisory practices in

the insurance industry and makes differences between nations redundant. Harmonised

supervision in the EU paves the road for harmonised products, which in turn provides

enormous opportunities for companies to compete on a Europe-wide scale (Doff

2007, page 141).

“The case of AIG in the US is noteworthy. No one in the US and elsewhere denies

that the collapse of that major institution was the result of a weak state-by-state

insurance regulatory system and of the absence of a single responsible supervisory

body at the Federal level. More generally, the US authorities are likely what most

consider as a too fragmented supervisory system. The EU must obviously avoid such

pitfalls.”

Jacques De Larosiere

Chairman of the high-level group on financial supervision

According to Swedish Regulatory Authority (Sjöö) Solvency II will:

- increase risk control and risk management in company

- relate the required capital to risks

- have regulations adjusted for both small and large companies

- increase the transparency of accounting and ease customers/analysts possibilities to judge companies

- increase policy holders safety

- increase rivalry on the European insurance market which should though make the insurance cheaper for insurance takers (?)

Solvency II has though different impacts of life insurance and traditional insurance companies.

23

Premium levels

Solvency II and transparency might reduce cross-subsidies, which therefore would

increase the prices of some risk- and capital-intensive lines of businesses. This in turn

would increase the premium levels for these products, depending the efficiency and

competitiveness existing on the market (Pwc, Changing the competitive landscape,

2007, page 2).

Tougher supervisory, risk management, compliance requirements, driving the

company and managing the company generates big costs to the industry when the new

requirements are established. Especially, when the directive is implemented,

companies are expected to invest on new it-systems and solvency calculation models

to comply with the directive and modify the operations meet the directive requirement

standards. The cost of this directive is estimated to be between two and three billion

euro in the Europe but it can even be higher or less depending how successfully the

directive and its amendments are carried out (Barr).

Part of the cost falls to insurance takers but also shareholders and insurance

companies are paying the bill. Higher capital requirement affects to the returns of

shareholders and insurance companies when the cost for capital increases. On some

insurance products the capital requirement is increased heavily. Consumers pay more

but get less credit risk from their insurance company. Consumers are expected to

appreciate the security that Solvency II brings, and they are expected to be ready to

pay for it. The cost of the regulation is paid by investors and policyholders, meaning

people or corporations buying the insurance, as premium levels are supposed to

increase. The utility and increase on the social welfare is though open but the

insurance takers are assumed to valuate the increased security and willing to pay for it

(Barr).

24

Supply of insurance products and behaviour of different lines of insurance

business

Staffan Hansén gives a short description about the life-insurance market and the

impact of Solvency II into it. There exist two kinds of life-insurance products

traditional life-insurance and fund insurance. Traditional life-insurance is a product

where the company has a warranty for instance 2% return for capital that is put in and

gives an authority for the insurance company to manage these assets. A life-insurance

company with a traditional insurance has to keep a certain amount of capital in their

book when they have promised to pay a return of 2% to the customer. To hold large

amount of capital is not preferred because if the interest rates or equity values

decrease there is someone who has to backup the costs. The back up is done by

external capital, which is costly. In fund insurance there are no warranties because it

is on best effort basis. It is customers that are managing their assets in the funds,

which the company provides for the customers. This means there are no high costs for

the company because there are no warranties. The customer gets all the return and

bares all the risk.

Hansén explains that when the Solvency II is implemented the warranty elements are

going to change. There will become new warranty products on the markets that are

not binding capital. These products are not including warranties on the same level as

they do at the moment. Companies will be careful with promising a certain return on

invested capital. Also Sjöö highlights the decrease on current warranty products as

long warranties means costs. Hansén continues that in fund insurance the cost

structure might be changing from variable costs to fixed cost which means that the

cost is proportional to income or value of the asset that customer has invested in the

fund. This is especially advantage for customers if the markets are swinging.

Barr states that companies are expected to face increased premiums but also increased

range of products. The increased capital requirements leads into less marginal that

companies give to consumers. This can be seen on life-insurance products when the

insurance company decreases the risk by lowering share of stock investments. This

leads to less return on equity and that in turn can lead to a situation where some

consumers decide to avoid some products. Looking it from the other perspective,

decreased risk might lead companies to decrease warranties on their products and

25

increase their marginal on that way. For instance a decreased warranty for interest

payment on some products is possible. This could also lead from warranty products to

products where the customer bares all the risk by himself. From a study that Pwc has

done the profitability of some products will decrease due to higher capital charges that

are included in Solvency II. This can lead to redesigned products that reduce capital

requirements or can even take them beyond an insurance designation (Pwc, Making

your capital work harder, page 4).

Barr states that Solvency II might increase demand for risk management products that

investment banks can supply. Investments on obligations are expected to increase and

there might be an outcome where consumers choose to invest more on, for example,

credit obligations instead of stock markets and lower their risk exposure this way.

One alternative is to decrease the risk exposure by reinsurance or using financial

instruments for instance long derivative bonds, catastrophe obligations that are

arranged by Special Purpose Vehicles (SPV). Investment banks might choose to offer

customized derivative contracts in the future.

Also Hansén states that overall the supply of products and innovative products will

increase. Life-insurance companies are going to learn to know their products better.

They will optimize their products so that capital required is less than company’s own

capital base. Then there is no need for external capital. The optimized product

generates income even in the future despite the volatility of the markets. When the

markets volatility creates negative effects and company has bad products, not

optimized products, company needs to use external finance to back up difference

between capital required and its own capital base. The external capital increases the

costs. In the long run the bad products decrease and more sustainable products

increase. At the moment this is not the case in the markets (Hansén).

Barr states that under the Solvency II the company gets fully paid for innovating new

products to decrease the cost of capital requirement. This means that insurers will get

more paid by optimising their risk exposure. This was not offered during the previous

regulation system and capital allocation was not supported from decreased risk

exposure.

26

Captive market and structure of insurance programs

According to Karl-Ove Andersson the captive market in general has been increasing

every year. Recently some Swedish municipal companies have been keen to establish

captives as a part of their insurance programs. It is not though only larger companies

that use captives. This is because of Swedish legislation and its supportive attitude

towards captives. Even some foreign captives have moved their base to Sweden due

to the Sweden’s supportive legislation. This trend probably continues in the near

future.

Lately the developing trend and expansion of captive market in the Europe has though

weakened. This is result from two things. Partly due the traditional insurance markets

decreasing premium levels but also due to Solvency II and its quite unknown impact

on the captive market. On the long run it is assumed that captive market will increase

when the premium levels on the traditional insurance market rises. Captive market is

waiting for Solvency II to be taken in use so that captives know how to handle it. This

will increase the demand for captives in the becoming years.

Solvency II will increase the level of capital that is required to run the insurance

business for the most of the companies, including captives. Captives build up their

capital reserves during the years and increase of capital requirement shouldn’t be a

problem on the Swedish market. If there would be any need to capitalise some of the

captives then the parent of captive could transfer the capital to fulfil the required

capital level. Approximately 20 % of the European captive market is facing increased

capital levels. On the Swedish captive market the share of captives that need

capitalisation will be less than in the European captive market.

According to Andersson questions rise more in the qualitative part like risk

management and control of the operation which includes increased requirement for

documentation, control of operations, control of risks, compliance functions etc. The

foundation of Solvency II is to have control over the operations and risks but also to

be aware of counterparty risks. To know and accept different risks on the front and

backside of the business, meaning risks that evolve from customer side and also from

insurance companies that captives use as reinsurers. Also Sjöö mentions the

improvements to consider counterparty risks under Solvency II. Solvency II is wider

27

than Solvency I and covers even counterparty risks. Sjöö continues highlighting that

counterparty risk is important factor in case of captives.

Andersson says that all these risks have been present before and owners of captives

have been aware of them. These are fundamental parts of captives but the difference

under Solvency II will be the documentation and work to meet the requirements that

supervisory authority demands. There can sometimes arise questions for example on

how some of the counterparty risks are priced. External auditors are going to have

their own role by controlling that the requirements are met on the right way when the

implementation of Solvency II in 2013 takes place.

When the Solvency II is implemented and premium levels increase from the existing

levels it should lead to increased incitement to self-insure, that is to establish a

captive, own risks among those companies that are interested to establish captive as a

part of the risk management. Also Sjöö believes that despite Solvency II regulations

industrial and municipal companies are still interested to build captives. Increased

capital requirements shouldn’t dampen the incentive to build a captive as premium

levels increase and the utility to use a captive increase. Increasing administrative costs

under Solvency II will still stay relatively low and it should not have an effect on the

decision to establish and use captives.

Negative impact on a specific captive will be if the captive is only used to reinsure

risks. Then the owner of the captive should demand higher capital buffer, which will

affect negatively on captive. This is because capital requirements are higher for

unrated companies (captives that only reinsure risks) than traditional reinsurance

companies that are rated by rating agencies. Unrated reinsurers should demand higher

reinsurance premium levels. This should lead to a situation where interest for direct

captives increase (Andersson).

Employment, organisations and competition on insurance market

A study from Pwc states that Solvency II is a labour intensive model, which means

that risk management, internal control, internal audit and actuarial functions have to

be on their places latest when the new regulation goes live. More complex and

extensive analysis is required, which is likely to increase the demand for people with

28

actuarial and risk management skills (Pwc, Changing the competitive landscape,

2007, page 4). By rationalising insurance company’s organisational structure the

company may achieve lower costs and tax burden can be reduced. For example a

company that operates across EU via branch offices can market products locally,

while concentrating capital in a single tax-efficient location (Pwc, Making your

capital work harder, page 3).

According to Daniel Barr the focus on Solvency II regulation is to change the

supervision from the solo level to the group level in larger insurance companies. This

is because the supervisory will be done more efficiently on group level. Also Sjöö

mentions improvements on the organizational supervisory structure. More resources

are though needed for the supervisory authority as a new formation for supervisory

takes place. Procedures on reporting are standardised which harmonise the

supervisory in the European Economic Area. Barr states that the new structure of

group based supervisory leads in some cases to a situation where some jobs might

become unnecessary. This means savings to the company.

According to Hansén Solvency II and its three foundations, capital requirements,

supervisory and reporting, pave the road for the SPP life insurance company to

approach the Solvency II. Capital requirement decides how much capital company

needs. The company can decide how much risk it wants to retain; more risk means

that more capital is needed. What becomes to Pillar II and Pillar III is that the

company has to be aware of its risks and report it to the supervisory authority. It is not

possible to have only one person who understands Solvency II and the requirements.

It is the management and the board of the company who have the responsibility.

Board of directors will get greater responsibility to be aware of what the company

does and have to be aware of company’s capital and risks in more detail.

To be aware of risks and to be successful on that there has to be really effective

management models, which means very clear responsible areas. Clearly defined

difference between business and supervisory is needed. Chief Risk Officer (CRO) is

playing an important role separating business and supervisory. Also an appropriate

reporting system has to be on place to report internally and to supervisory authority.

SPP, the life insurance company, did an analysis where the current situation was

defined and where they wanted to be in the future.

29

As the directive still is on a development phase it is not known exactly what the

requirements are. These changes or updates on directive have lead SPP, the life

insurer, to manage the information flow of directive effectively by appointing two key

people to observe the updates. These two people summarize and send the information

to the other people in the company. Supervisory and preparations has not though

opened any new positions in the company but it has increased responsibilities. What

becomes to ORSA, the company see it as a very work-demanding model that

demands focus from managers. Internal education, documentation, filing and

reporting are other focus areas that every company has to revaluate. The IT-system is

though the most demanding and costly to get in the place (Hansén).

Larger companies have more resources to invest in risk and capital management

systems, which could lead to a situation where they have a more efficient risk control

system in place that lowers their capital charges. Larger companies get advantage also

from diversification of product lines and geographical operations, which could reduce

their solvency levels. This kind of advantages can widen the gap between

sophisticated and less sophisticated companies (Pwc, Changing the competitive

landscape, 2007, page 2). Pwc also suggest that mergers & acquisitions activity may

increase as companies seek to offload those parts of their business that are non-core

part and demand unnecessary high levels of capital (Pwc, Making your capital work

harder, 2011, page 2).

According to Barr the number of bankruptcies is expected to decrease for two

reasons, partly the increased capital buffer and increased focus on the management.

The capital buffer dampens the risk to become insolvent. This is also due to the

operational awareness that is raised through higher requirements for own risk

management. Quantitative model, Pillar 1 and qualitative model, Pillar 2 are playing

key roles in this. Solvency II makes companies more transparent to the public interest

(Pillar 3). Barr clarifies that accounting rules, that we already have today, make

companies transparent. Thus overall the transparency can be seen to increase on a

marginal level. How big the cost increase will be is difficult to measure because the

previous system allowed some part of the capital buffer to be hidden being part of the

loans. It can be stated that previous regulation, Solvency I, lacked the relevance.

30

Ayadi et al (2006) states that close cooperation with the industry and market practices

is needed in the development stage of the new solvency regime while ensuring right

level of prudence. The competitiveness of European insurance companies worldwide

could be jeopardised if inappropriately high level of capital is required as a price for

double counting of prudence. The EU has a pivotal role in the development of the

new solvency regime for insurance companies. The EU is the first critical mass to

apply the new solvency rules. EIOPA (the European Insurance and Occupational

Pensions Authority) plays a vital role in promoting a consistent and harmonised

implementation of the Solvency II (Ayadi et al., pages 85-86).

Close co-operation can already be seen when a new amendment, Omnibus II, is

created to make possible change to Solvency II directive. Directive is on its place but

there might be some details that need to be changed to make sure that it can be

integrated. Omnibus II makes it possible for the European Commission to change the

directive if there is need for it. For example in capital requirements for captives this

might be the case (Barr).

According to Choi et al. the efficient structure of the industry posits that more

efficient firms are able to charge lower prices than competitors, which enables them

to take larger markets share and economic rents. This leads to increased

concentration. Choi et al. states that concentration levels should increase if the

markets have efficient structure. They conclude that overall concentration levels have

increased significantly especially in the property-liability insurance industry from

1993 to 2000. They continue that the merger and acquisition activities in the

insurance industry may lead to collusive prices that are higher than competitive rates.

If the efficiency is supposed to lead firms to increase market share and profits, then

the regulators should focus on whether the insurers share their gains from efficiency

with consumers in the form of lower prices. Choi et al. concludes that regulators

should be more worried with efficiency (both costs and revenues) rather than market

power that might be the result of consolidation (Choi et al. 2005).

Section 5: Conclusions

31

Solvency II is a more formal approach to governance, organisation and decision-

making what becomes to risk-awareness and its implementation into the overall

business that insurer is dealing with. Before Solvency II goes live companies need to

prepare their organisations with changes in strategy, processes, management and

governance in their business. This means investments in expertise and new systems.

Larger companies have advantage, as they are able to invest more on preparations and

systems, compared to smaller companies. Solvency II is costly, as insurance

companies need more capital to run their business, which is supposed to lead to a

significant number of insurers restructuring and consolidation of their businesses to

remain competitive.

Increased premium levels are to be expected as the cost of Solvency II falls to

investors and policyholders. Increased supply of products is expected as the regime

moves towards more harmonised market but negative impact might be a result from

less competition. Decreased competition on some product categories can mean more

increased premium levels, as insurers must allocate more capital there where the risks

are. On captive market the supervision and regulation is getting more harmonised,

that makes captive market more aware of the risks, including counter party risks, and

demand for captives is expected to increase when the Solvency II is in use. The

regulation will create new positions especially positions dealing with organisational

risk but also consolidate the organisational structure to make organisations more

effective.

The competition on industry depends of the efficiency and concentration level of the

insurance industry. If the markets have an efficient structure then prices are expected

to decrease but if there is lack of competition then prices for insurance increase.

Based on the study it is assumed that the increased regulation and supervisory are

leading to more harmonised industry in the EEA which makes it easier for insurers to

operate across Europe. This paves the road for more competitive insurance market,

though expected to be dominated by larger insurers. The higher level of supervisory

and regulation requirement increase the policy holder protection. It is though very

important not to underestimate the administrative costs of the Solvency II. The costs

of implementation of Solvency II might outweigh the benefits of regulation in the

short term, but in the long term the utility of regulation is expected to outweigh the

32

costs. Whether or not Solvency II will achieve the goals of the regulation remains to

be seen.

33

References:

Abraham, E., Cornall, M., & Madinier, T. from Pricewaterhouse Coopers – Changing the competitive landscape: The commercial implications of Solvecy II, October 2007, http://www.pwc.com/gx/en/insurance/solvency-ii/bridging-risk-capital.html (visited 7. March 2011)

Alahassane, D. & Sangphill, K., 1989, Asymmetric Information, Captive Insurers’ Formation, and Manager’s Welfare Gain, The Journal of Risk and Insurance, 56 (2): 233-251

Ayadi, R. & O’Brien C. - The Future of Insurance Regulation and Supervision in the EU: New Developments, New Challenges (2006)

Bawcutt, P. – Captive Insurance Companies; Establishment, Operation and Management (1997), 4th Edition, Witherby & Co. Ltd.

Butsic, R. P., 1994, Solvency Measurement for Property-Liability Risk Based Capital Applications, The Journal of Risk and Insurance, 61 (4): 656-690

Choi, B., P. & Weiss M., A., 2005, An Empirical Investigation of Market Structure, Efficiency, and Performance in Property-Liability Insurance, The Journal of Risk and Insurance, 72 (4): 635-673

Doff, René - Risk Management for Insurers: Risk Control, Economic Capital and Solvency II (2007), Risk Books, a Division of Incisive Financial Publishing Ltd

Faure, M. G., & Hartlief, T., 2003, Insurance and Expanding Systemic Risks, vol. 5 of the OECD publication series in “Policy Issues in Insurance” http://browse.oecdbookshop.org/oecd/pdfs/browseit/2103041E.PDF (visited 23. February 2011), new Internet site: http://www.keepeek.com/Digital-Asset-Management/oecd/finance-and-investment/insurance-and-expanding-systemic-risks_9789264102910-en (visited 9. May 2011)

Försäkringsförbundet, http://www.forsakringsforbundet.com (visited 1. June 2011)

Howe, J., Pallister, J., & Hansen, F. L. from Pricewaterhouse Coopers – Countdown to Solvency II: Making your capital work harder, February 2011, http://www.pwc.com/gx/en/insurance/solvency-ii/countdown/0311-making-your-capital-work-harder.html (visited 7. March 2011)

Hörngren, L. & Viotti, S. – Försäkringsmarknaden (1994), 1:a upplagan, SNS Förlag

Insurance Solvency Supervision: OECD Country Profiles, April 2002 Available on the OECD Internet site: http://browse.oecdbookshop.org/oecd/pdfs/browseit/2102021E.PDF (visited 23. February 2011), new Internet site: http://www.keepeek.com/Digital-Asset-Management/oecd/finance-and-investment/insurance-solvency-supervision_9789264196230-en (visited 9. May 2011)

Lechkar, M., Van Meerten, H. and Nijenhuis, O., 2009, The Solvency II Directive: An Innovative New Regime

34

Munch, P. & Smallwood, D., E., 1980, Solvency regulation in the property-liability insurance industry: empirical evidence The Bell Journal of Economics, 11 (1): 261-279

Nya solvensregler för försäkringsföretag, Dir 2010:14, Kommittédirektiv Internet site: www.sweden.gov.se/content/1/c6/14/09/34/706fb87a.pdf (visited 2. April 2011)

Rothschild, M. & Stiglitz, J., 1976, Equilibrium in competitive insurance markets: An essay on the economics of imperfect information, The Quarterly Journal of Economics, 90 (4): 629-649

The CEA – the European insurance and reinsurance federation homepage:

http://www.cea.eu (visited 2. June 2011)

The Economist, January 15th 2011, Briefing: The euro area’s debt crisis, Bite the bullet

Daniel Barr, Head of Bank Support Department at the Swedish National Debt Office (Riksgälden). Previously Daniel has hold positions as Chief Economist at the Swedish Pensions Agency (PPM) and Chief Analyst at AP7 (Sjunde AP-fonden). Daniel is leading the investigations about the Solvency II directive and it’s implementation to the Swedish laws and system. (Interviewed on 9th May, Stockholm)

Bertil Sjöö, Deputy Insurance and Investment Funds Department Director at Finansinspektionen, 17 years long career at Finansinpektionen. (Interviewed on 19th May 2011, Stockholm)

Karl-Ove Andersson, Head of Captive Operations in the Nordic, Marsh Management Services Ab, Marsh is the world's leading insurance broker and risk adviser. (Interviewed on 12th May 2011, Stockholm)

Staffan Hansén, Chief Investment Officer, SPP, Sweden (Interviewed on 27th May 2011, Stockholm)