Combining Fair Pricing and Capital Requirements for Non-Life Insurance Companies

Posted: 21 Aug 2012

See all articles by Nadine Gatzert

Nadine Gatzert

Friedrich-Alexander University Erlangen-Nürnberg

Hato Schmeiser

University of Münster - Faculty of Economics; University of St. Gallen - I.VW-HSG

Date Written: May 25, 2008

Abstract

The aim of this article is to identify fair equity-premium combinations for non-life insurers that satisfy solvency capitalrequirements imposed by regulatory authorities. In particular, we compare target capital derived using the value at risk concept as planned for Solvency II in the European Union with the tail value at risk concept as required by the Swiss Solvency Test. The model framework uses Merton’s jump-diffusion process for the market value of liabilities and a geometric Brownian motion for the asset process; fair valuation is conducted using option pricing theory. We show that even if regulatory requirements are satisfied under different risk measures and parameterizations, the associated costs of insolvency – measured with the insurer’s default put option value – can differ substantially.

Suggested Citation

Gatzert, Nadine and Schmeiser, Hato, Combining Fair Pricing and Capital Requirements for Non-Life Insurance Companies (May 25, 2008). Journal of Banking and Finance, Vol. 32, No. 10, 2008, Available at SSRN: https://ssrn.com/abstract=2132471

Nadine Gatzert (Contact Author)

Friedrich-Alexander University Erlangen-Nürnberg ( email )

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Nuremberg, 90403
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HOME PAGE: http://www.vwrm.rw.fau.de

Hato Schmeiser

University of Münster - Faculty of Economics ( email )

Universitätsstr. 14-16
48143 Munster
Germany

University of St. Gallen - I.VW-HSG ( email )

Kirchlistrasse 2
St. Gallen, 9010
Switzerland

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