Risk Management and Financial Institutions. Hull John C.

Risk Management and Financial Institutions

applies to insurance companies throughout all member countries. The framework that has existed since the 1970s is known as Solvency I. It was heavily influenced by research carried out by Professor Campagne from the Netherlands who showed that, with a capital equal to 4 % of policy provisions, life insurance companies have a 95 % chance of surviving. Investment risks are not explicitly considered by Solvency I.

A number of countries, such as the UK, the Netherlands, and Switzerland, have developed their own plans to overcome some of the weaknesses in Solvency I. The European Union is working on Solvency II, which assigns capital for a wider set of risks than Solvency I and is expected to be implemented in 2016. Both Solvency I and Solvency II are discussed further in Chapter 15.

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1

This is close to the historical average, but quite a bit higher than the Treasury yields seen in the years following 2008 in many countries.

2

It is sometimes referred to as Jensen's alpha because it was first used by Michael Jensen in evaluating mutual fund performance. See Section 4.1.

3

GNMA has always been government owned whereas FNMA and FHLMC used to be private corporations with shareholders. As a result of their financial difficulties in 2008, the U.S. government had to step in and assume complete control of FNMA and FHLMC.

4

In theory, for a contract to be referr

1

This is close to the historical average, but quite a bit higher than the Treasury yields seen in the years following 2008 in many countries.

2

It is sometimes referred to as Jensen's alpha because it was first used by Michael Jensen in evaluating mutual fund performance. See Section 4.1.

3

4

In theory, for a contract to be referred to as life assurance, it is the event being insured against that must be certain to occur. It does not need to be the case that a payout is certain. Thus a policy that pays out if the policyholder dies in the next 10 years is life assurance. In practice, this distinction is sometimes blurred.

5

See R. H. Litzenberger, D. R. Beaglehole, and C. E. Reynolds, “Assessing Catastrophe Reinsurance-Linked Securities as a New Asset Class,” Journal of Portfolio Management (Winter 1996): 76–86.

6

See “How to Modernize and Improve the System Insurance Regulation in the United States,” Federal Insurance Office, December 2013.

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