Maria Grazia Starita

Capital Requirements, Disclosure, and Supervision in the European Insurance Industry

1. Capital Requirements, Disclosure and Supervision in the European Insurance Industry PART I: THE FRAMEWORK OF SOLVENCY II AND THE CHARACTERISTICS OF THE EUROPEAN INSURANCE MARKET 2. Solvency II Directive and the Key Features of the European Insurance Market PART II: SOLVENCY: REQUIREMENTS AND SUPERVISION 3. The Solvency Capital Requirement 4. The Supervision of Insurance Companies PART III: THE RELATIONSHIP BETWEEN REQUIRED REPORTING AND ACTUAL DISCLOSURE 5. The Regulatory Framework for Market Discipline 6. The Actual Disclosure 7. Solvency II: A Sea of Opportunities

The effectiveness of risk disclosure practices in the European insurance industry

Purpose This paper examines whether risk disclosure practices affect stock return volatility and company value in the European insurance industry. Design/methodology/approach Using a self-constructed “Risk Disclosure Index for Insurers” (RDII) to measure the extent of information disclosed on risks and employing panel data regression on a sample of European insurers for 2005–2010, it tests: i) the relationship between RDII and stock return volatility; ii) whether this relationship is affected by financial crisis; iii) whether RDII affects insurance companies’ embedded value. Findings The main results indicate that higher RDII contributes to higher volatility, suggesting that “less is more” rather than “more is good”. However, higher RDII leads to lower volatility when the insurer has a positive net income, thus “more is good when all is good” and “less is good when all is bad”. Furthermore, the relationship between RDII and stock return volatility is not affected by financial crisis, raising concerns rega...

Does Corporate Governance Affect Earnings Management? Evidence from the US P&C Insurance Industry

Our study investigates whether corporate governance plays a role in mitigating earnings management in the US Property and Casualty insurance industry. Using a direct measure of managerial bias, our results show the following: first, stock-based components of CEO compensation are associated with reserving practices only when we control for the cross-effect between these components and the presence of a Big4 external auditor; second, independent directors, part of internal company monitoring mechanisms, and the main shareholder, among the external monitoring mechanisms, are effective in mitigating earnings manipulation; and third, the preliminary exercise on the effect of Sarbanes Oxley regulation coming into force reveals that the new regulation on governance has minimal or no impact on the relationship between corporate governance and earnings management in the insurance industry - it has long been heavily regulated for risk and governance.

The Actual Disclosure

This chapter provides an extensive description of the real approach to disclosure, and offers an empirical perspective of the market discipline process in the European insurance industry, in light of the importance assumed by this theme under the regulatory framework on capital requirements for European insurers (Solvency II), as discussed in Chapter 5. It enters into the debate that aims to identify, describe, and emphasise the importance of disclosure, detect the factors that could favour its enhancement, and test its effectiveness, examining both qualitative and quantitative issues. Thus, it provides an in-depth analysis of the actual disclosure, particularly concerning insurance industry, and has six main goals: n n ndistinguishing disclosure from certain related topics, namely transparency, communication, market discipline, and reporting, and providing a new and comprehensive definition of disclosure; n n ndiscussing the importance of disclosure and the call for enhanced information levels, focusing on both economic theory and the contextual factors that emphasise the need for reporting, from existing literature to companies’ incentives, supervisory initiatives, and financial turmoil, both in the insurance industry and the overall financial system; n n nsummarising the debate in the existing literature on disclosure practices, distinguishing between seminal and recent studies, for financial and non-financial companies, risk disclosure, readability, determinants and effectiveness, and reporting the results obtained; n n nanalysing qualitative and quantitative disclosure, showing whether and how they relate, and selected initiatives for enhancing their extent; n n ndescribing the content analysis methodology and building a disclosure index that allows to compare the theoretical framework with effective disclosure; n n nproviding empirical evidence on disclosure practices for a sample of European insurance companies identified in Section 2.3.

The Regulatory Framework for Market Discipline

This chapter provides a wide description of the regulatory framework for market discipline in the European insurance industry in light of the importance assumed by this theme under the framework for European insurers’ capital requirements (Solvency II). It enters into the debate that aims to identify the function of supervision in financial markets, the flows of mandatory information established, and the role of stakeholders in this process. Thus, it provides a deep analysis of market discipline in the European insurance industry and has six main goals: n n nidentifying the role and relevance of supervisory authorities in financial markets; n n ndescribing the characteristics of supervision and market discipline in the European insurance industry under the regulatory framework of Solvency II (Directive 2009/138/EC); n n nidentifying the schemes, principles, and initiatives for supervision and market discipline; n n ndistinguishing disclosure into three types: disclosure by insurers (addressed both to supervisory authorities and to the public), disclosure by supervisory authorities, and disclosure by groups; n n ncomparing the European to the globally accepted principles of insurance regulation, in an attempt to promote consistency and homogeneity; n n nidentifying the internal and external stakeholders involved in the market discipline process and the roles they play.

The Solvency Capital Requirement

This chapter provides a deep analysis of the first pillar of the European regulatory framework on capital requirements for the insurance industry and has six main goals: n n ndescribing the principles for the assessment of insurers’ assets, liabilities, and own funds according to the first pillar of Solvency II (Directive 2009/138/EC), and in order to estimate the new capital requirements; n n nidentifying the role and the characteristics of the solvency capital requirement (SCR), that is the level of capital requirement that is able to face all quantifiable risks to which an insurer is exposed; n n ncomparing the principles of Solvency II with the ones from the economic theory; n n nidentifying the role and the characteristics of the minimum capital requirement (MCR), that is the level of capital requirement for which, when going below it, policyholders and beneficiaries are exposed to an unacceptable level of risk; n n nidentifying the main causes of an insurer’s insolvency and the risks for policyholders and beneficiaries involved in the insurance processes; n n nestimating the new capital requirements for a sample of insurers identified in Section 2.3.

Solvency II Directive and the Key Features of the European Insurance Market

This chapter describes the Solvency II Directive (2009/138/EC), which is the regulatory framework for the European insurance industry. This chapter also provides statistics on the European insurance market, and introduces a sample of European insurance companies that is used in the next chapters for providing empirical evidence of the theoretical topics analysed. Thus, this chapter has three main goals: n n ndescribing the characteristics, principles, and aims of the regulatory framework of Solvency II; n n nidentifying the key features of the European insurance market and distinguishing between life and non-life insurance activities providing statistics for both; n n nselecting a sample of European insurers that can be used to empirically test the theoretical topics analysed in the subsequent chapters of this book.

The Supervision of Insurance Companies

This chapter analyses in depth the supervision on insurance companies according to the second pillar of Solvency II, and has the following main goals: n n nidentifying the different approaches through which an insurer should control own system of risks (internal control approach, risk management approach, and asset-liability management (ALM) approach); n n ndescribing the principles of the conect functioning of the internal control system (internal control approach); n n ndescribing the principles for building an appropriate risk management framework with respect to the insurer’s system of risks (risk management approach); n n ndescribing the principles of the asset-liability management (ALM approach); n n nidentifying the duties of the supervisors with respect to the control on the insurance companies; n n nanalysing the characteristics of the supervisory review process (SRP); n n nidentifying the characteristics of the last resort measure that is the capital add-on and that may result from the SRP; n n nidentifying the main functions of the Own Risk Solvency Assessment (ORSA) as the link between the internal control and the control performed by the supervisory authorities; n n ndescribing the main features of the corporate governance of the sample of insurers identified in Section 2.3 in terms of role and responsibilities of the internal control system, of risk management practices and of investment portfolio.

Financial Turmoil and Asymmetric Information Theory: Evidence from the e-Mid Platform

The industrial countries have been severely affected by the financial crisis because of the high degree of financial engineering of their economies. In order to understand the transmission effect of sub-prime mortgage default on the financial system and, consequently, on the economic system, it is necessary to retrace some key stages (as in Cassola et al., 2008b).