New Risk-Based Capital Standards in the European Union: A Proposal Based on Empirical Data


  • The author would like to thank Michael R. Powers for helpful comments on an earlier draft of this article. In addition the author would like to thank the Gesamtverband der Deutschen Versicherungswirtschaft (German Insurance Association), Berlin, for its help in collecting the data used in this article and for its financial support.


In response to criticism concerning the current solvency system, the European Commission is developing new rules for insurance companies operating in the member states of the European Union (EU). Under this so-called Solvency II concept, an insurer is allowed to verify its solvency by using an internal risk management model previously approved by the regulatory authority. In this article we develop such an internal risk management approach for property-liability insurers that is based on dynamic financial analysis (DFA). The proposed concept uses a simulation technique and models the central risk factors from the investment and underwriting areas of an insurance company. On the basis of the data provided by a German insurer, the ruin probabilities under different scenarios and varying planning horizons are calculated.