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The impact of Solvency II on Bond Management [extrait BMI HS_BMI_2014]

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Under Solvency II, insurers are required to hold a capital charge to cover risks related to each asset class they invest in. This is likely to structurally change the way in which insurers? assets are managed. After almost a decade of studies and debates, the European Commission has to fix the final risk calibration in 2014. With regard to the recent major credit crisis and its repercussions on the subsequent financing of European economies and firms by the insurance industry, one of the key challenges is the calibration of interest rate risk and spread risk. This article contributes to the ongoing literature by studying the accuracy of bond solvency capital requirements (SCR) and discussing the expected impact of Solvency II on insurers? bond management practices. Based on a large sample of 4,279 fixed-rate bonds, we show that: i) modified duration and rating are the main variables explaining bond SCR behaviour; ii) bond SCR is an overall satisfactory measure but it should be adjusted to incorporate economic cycles; iii) the standard formula produces an inaccurate assessment for long maturity investment grade bonds and high yield bonds; and (iv) Solvency II could lead to a shortening of duration of bond investments.Keywords: Solvency II; Insurance; Bond management; Capital requirement; Regulation; Value-at-Risk.JEL codes: G22; G20; G11; C10.

Auteurs :Arias Liliana
Extrait de la revue BMI HS_BMI_2014


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