How is risk management contributing to financial stability? The perspective of a European-GSII

Abstract

By giving an overview of the progress made on risk-based capital frameworks over the last decade, notably in Europe through Solvency II, this paper sheds light on the operational consequences it has had on the insurance sector in Europe. This notably consists of improving the entire risk management framework, starting with pure calculation enhancement (as part of pillar 1), the use of the risk appetite framework and the implementation of the own risk and solvency assessment process. Having described the main features of the regulatory requirements put forward by the Financial Stability Board and the International Association of Insurance Supervisors for globally systemic insurers (G-SIIs) and the requirements, this paper explains the role of the Solvency II framework with regard to the recent designation of a list of G-SIIs. In conclusion, as economic capital modelling (including Solvency II) and the documentation part of the systemic risk management framework have already led to a strong reinforcement of insurance groups, there is no evidence that new regulation on the capital front is needed to protect the financial system, especially one targeted only at the largest institutions which already benefit from advanced risk management frameworks (such as the higher loss absorption capacity).