Minimum Standards for Investment Performance : A New Perspective on Non-Life Insurer Solvency

The aim of this paper is to develop an alternative approach for assessing an insurer’s solvency as a proposal for a standard model for Solvency II. Instead ofderiving minimum capital requirements—as it is done in solvency regulation—our model provides company-specific minimum standards for risk and return ofinvestment performance, given the distribution structure of liabilities and a predefined safety level. The idea behind this approach is that in a situation of weaksolvency, an insurer’s asset allocation can be adjusted much more easily in theshort term than can, e.g., claims cost distributions, operating expenses, or equitycapital. Hence, instead of using separate models for capital regulation and solvency regulation––as is typically done in most insurance markets––our singlemodel will reduce complexity and costs for insurers as well as for regulators. Inthis paper, we first develop the model framework and second test its applicabilityusing data from a German non-life insurer.