Solvency

from Wikipedia, the free encyclopedia

Under Solvency (including capital adequacy called) are understood in insurance - and banking facilities of a insurer or a credit institution with equity ( own funds (insurance) , own funds (bank) ). The own funds are used to cover risks that arise in the insurance or credit business and thus secure the claims of policyholders or creditors even in the event of unfavorable developments. The higher the solvency, the better these claims are secured. The own funds are mainly composed of the equity, the statutory and free reserves and the profit carried forward .

Insurance

When it is set up, a mutual insurance association (VVaG) must have free unencumbered own funds at least in the amount of the required solvency margin . This foundation stock ( § 178 VAG) includes the funds for the guarantee capital , for the establishment and establishment of the company and for the operating costs . The amount of the foundation stock must be specified in the articles of association , as well as its formation, interest and repayment .

Solvency for existing insurers is regulated by law in Sections 89 to 123 of the Insurance Supervision Act (VAG). According to this, insurers are obliged to ensure the permanent fulfillment of the obligations from the insurance contracts to create free unencumbered own funds in the amount of the solvency margin (which, strictly speaking, is not a margin, but an amount), which is measured according to the entire scope of the business.

It should be noted here that the determination of the solvency margin is not based directly on the insurer's risk situation today, but mainly refers to purely accounting values. This means that the actual risk situation is not always properly taken into account.

The calculation of solvency is regulated in the Capital Equipment Ordinance (KapAusstV). It contains different rules for life insurance (including pension and death funds ) on the one hand and all other lines of business on the other.

The minimum required solvency can be divided into three levels:

  • Solvency margin , which is calculated as a percentage depending on the premium income or claims expenses. In life insurance, the solvency margin is measured primarily in relation to the actuarial reserve and the risked capital.
  • Guarantee fund equal to one third of the solvency margin
  • Absolute minimum guarantee fund of € 2.3 million per branch to be operated (for branches classified as particularly risky, e.g. liability, this amount is € 3.5 million).

The actual solvency is determined by the free, unencumbered own funds. Their essential components are included

  • the total of the equity capital as well as functionally equivalent (i.e. above all loss-absorbing) borrowed capital, d. H. Subordinated bonds or hybrid capital instruments
  • certain hidden reserves ( valuation reserves , e.g. in investments)
  • the additional funding potential at the VVaG
  • Free parts of the provision for premium refunds (RfB) for life insurers (including the final profit share fund)
  • until 2009 also future profits with life insurers

Sufficient solvency within the meaning of the VAG is given if the actual solvency is at least equal to the target solvency.

If the actual solvency falls below the target solvency - but is still more than a third above the amount of the guarantee fund - the insurer must draw up a solvency plan. If the actual solvency is below the value of the guarantee fund, a financing plan must be drawn up.

In the past, the solvency regulations were only relevant for primary insurers, as their customers are seen as particularly worthy of protection due to their mostly inadequate knowledge of the insurance matter. Since January 1, 2005, reinsurers have been subject to similar regulations.

The Federal Financial Supervisory Authority (BaFin) monitors sufficient coverage with own funds. Violations of the solvency regulations trigger sanctions by BaFin, the severity of which is based on the above. Levels are staggered ( § 134 VAG).

Example calculation formula (regulation before 2016)

Premium index (18% x gross premiums (for premium volumes up to € 61.3 million) + 16% of gross premiums (for premium volumes over € 61.3 million)) x retention rate (at least 50%)

Claims index (26% x gross claims (for claims expenses up to € 42.9 million) + 23% of gross claims (for claims volume over € 42.9 million)) x retention rate (at least 50%)

Criticism and Outlook

The existing solvency rules are widely criticized. I.a. it is stated that the multipliers for calculating the sovereignty margin were set arbitrarily in a political process and thus the risk theoretical knowledge of the entire post-war period was not taken into account. With the premium index, the paradox arises that an insurer who calculates more carefully and charges higher premiums will have a higher solvency requirement.

It should also be viewed critically that future profits for life insurers are included in the actual solva. If a company is in trouble anyway, you can hardly count on future profits. On the other hand, an insurer doing well shouldn't need future profits to pass the solvency test.

Since the implementation of the new European Solvency II supervisory regime on January 1, 2016, the solvency requirement has been determined in a much more risk-based manner.

In addition to the principle-based, prescribed approaches for determining solvency capital , the European directive also provides for a company-specific risk and solvency assessment under the keyword Own Risk and Solvency Assessment (often abbreviated to ORSA), in which the total capital requirement with a view to the risk profile, taking into account the company specifications with regard to risk tolerance and possibly rating classifications, medium-term compliance with the capital requirements and the recognition and valuation regulations for technical provisions and the appropriateness of the methods used to take into account the risk profile when determining the solvency capital. This instrument of the governance and risk management system of insurance companies must be fulfilled regardless of the use of the standard formula or an internal model. In order to straighten out the process of introducing Solvency II, so-called interim measures were published in spring 2013; the supervisory authority EIOPA is planning to implement this in national law in 2014.

Banking

In banking, solvency is understood to be the “adequate capital adequacy” of credit institutions, as required as a central standard in Section 10 of the KWG . According to this provision, institutions ( Section 1 (1) KWG), groups of institutions ( Section 10a (1) KWG) and financial holding groups ( Section 10a (3) KWG) must fulfill their obligations towards their creditors , in particular in the interests of security of the assets entrusted to them have adequate own funds. Principle I , which was replaced in January 2007 by the more comprehensive Solvency Ordinance, dealt with the concrete implementation of solvency until December 2006 . This in turn was replaced in January 2014 by the Capital Adequacy Ordinance (English abbreviation CRR). This EU regulation , which is also implemented in Germany in accordance with Section 1a (1) of the KWG, contains precise requirements for the adequate capital adequacy of credit institutions. The Capital Adequacy Ordinance regulates in particular the amount and the requirements for the regulatory capital to be kept available (Article 25 ff. CRR), the equity-related risk regulations (Article 107 ff. CRR), the consideration of loan collateral (Articles 194-217 CRR) and the large exposure regulations (Article 387 ff., 507 CRR). In addition to the - as risk positions designated - lending business also are market risks (. Art. 325 ff CRR) and operational risk (Art. 446) to be backed by capital. Appropriate equity capital can therefore be assumed if the minimum ratios required in Art. 92 (1) CRR (see core capital ratio ) are observed.

The capital backing for counterparty default risks is determined according to the standard credit risk approach ( KSA) or the internal ratings-based approach (IRBA). The institutions can use the basic indicator approach (BIA), the standard approach ( STA) or advanced measurement approaches (so-called ambitious measurement approaches AMA) to calculate the capital adequacy requirement for operational risks . The capital adequacy requirement for market price risks can be determined using the standard method (SM) or using internal market risk models.

Based on the volume and type of transactions carried out by the institutions, these are divided into non-trading book and trading book institutions . Institutions whose trading book is only of subordinate importance can, to make it easier, dispense with the determination of the trading book risks and count these as credit risk positions.

Web links

Individual evidence

  1. Federal Financial Supervisory Authority : Information sheet - Instructions for the approval of mutual insurance associations to operate property and casualty insurance in the Federal Republic of Germany August 22, 2008
  2. ^ Ordinance on the capital adequacy of insurance companies (capital adequacy ordinance) , repealed by Art. 1 No. 1 V. v. December 16, 2015 ( BGBl. I p. 2345 )
  3. risknet.de: "Company's own risk and solvency assessment "
  4. solvencyiiwire.com: "Solvency II News: interim measures may apply by 2014"
  5. Regulation (EU) No. 575/2013 of June 26, 2013, ABl. L 176