Toward a unified global regulatory capital framework for life insurers
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In many regions of the world, the solvency regulation of insurers is becoming more principle-based and market oriented. However, the exact forms of the solvency standards that are emerging in individual jurisdictions are not entirely consistent. A common risk and capital framework can level the global playing field and possibly reduce the cost of capital for insurers. In the thesis, a conceptual framework for measuring the insolvency risk of life insurance companies will be proposed. The two main advantages of the proposed solvency framework are that it addresses the issue of incentives in the calibration of the capital requirements and it also provides an associated decomposition of the insurer's insolvency risk by term. The proposed term structure of insolvency risk is an efficient risk summary that should be readily accessible to both regulators and policyholders. Given the inherent complexity of the long-term guarantees and options of typical life insurance policies, the term structure of insolvency risk is able to provide stakeholders with more complete information than that provided by a single number that relates to a specific period. The capital standards for life insurers that are currently existing or have been proposed in Canada, U.S., and in the EU are then reviewed within the risk and capital measurement framework of the proposed standard to identify potential shortcomings.