Risk Measures and Capital Requirements: A Critique of the Solvency II Approach

In this paper the Solvency II VaR-based capital requirement is analysed and discussed. The new European risk-based system of prudential regulation for insurers could in fact increase, and not decrease, the fragility of the insurance industry. More specifically, the VaR capital requirement exposes insurance companies to a potentially huge systemic effect, as the bigger/better diversified insurers have high default probabilities in case of market shortfalls. This paper shall suggest and discuss some adjustments to the current Solvency II framework.