Potential Impact Of Solvency II On Financial Stability, July 2007

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P OT E N T I A L I M PA C T O F S O LV E N C Y I IO N F I N A N C I A L S TA B I L I T YJ U LY 2 0 0 7

POTENTIAL IMPACT OF SOLVENCY IION FINANCIAL STABILITYJ U LY 2 0 0 7In 2007 all ECBpublicationsfeature a motiftaken from the 20 banknote.

European Central Bank, 2007AddressKaiserstrasse 2960311 Frankfurt am MainGermanyPostal addressPostfach 16 03 1960066 Frankfurt am MainGermanyTelephone 49 69 1344 0Websitehttp://www.ecb.intFax 49 69 1344 6000Telex411 144 ecb dAll rights reserved. Reproduction foreducational and non-commercial purposesis permitted provided that the source isacknowledged.ISBN 978-92-899-0198-7 (online)

CONTENTSEXECUTIVE SUMMARY51 INTRODUCTION82 ROLE OF THE INSURANCE SECTOR FORFINANCIAL STABILITY102.1 The positive role of insurancefor financial stability: the three10main channels2.1.1 The financial intermediaryfunction and the efficientallocation of capital in theeconomy102.1.2 Risk diversification and riskmitigation and reduction inthe overall level of risk102.1.3 The wider role of the insurancesector in the transfer of risks11within the economy2.2 Insurance as a potential threat tofinancial stability132.2.1 The traditional view regardinginsurers: not a source of13systemic risk2.2.2 Insurance as a potential sourceof vulnerability for thebanking sector132.2.3 Insurance and the potential to15disrupt financial markets2.2.4 Reinsurance as a risingpotential source ofvulnerability163 SOLVENCY II AND ITS POTENTIAL IMPACTON THE INSURANCE SECTOR3.1 Positive expected outcomes:improved efficiency andcompetitiveness of EU insurers3.1.1 Recognition of diversificationbenefits, consolidation andimproved efficiency3.1.2 Strengthened EU insurers’balance sheets3.1.3 Optimisation of capitalstructure, greater transparencyand market-based discipline3.2 Two potential negative aspects forfinancial stability18181819213.2.1 Some volatility of earnings andcapital position in EU insurers’23balance sheets3.2.2 Potential rising vulnerabilityin the reinsurance sector244 SOLVENCY II AND ITS POTENTIAL IMPACTON THE FINANCIAL MARKETS4.1 Positive expected outcomes ofpotential portfolio allocationsin favour of bonds4.1.1 Impetus for the developmentof the European corporatebond markets4.1.2 Diversification of investmentportfolios and possiblereduction of home bias4.2 Potential negative outcomes: therisk of financial market disruption4.2.1 Contained risk of financialmarket disruption in theshort termQuantitative analysis4.2.2 The potential to aggravatefinancial stress: a longer-termrisk5 SOLVENCY II AND ITS POTENTIAL IMPACTON THE BANKING SECTOR5.1 Positive expected outcomes5.1.1 Emergence of a level playingfield for European financialinstitutions5.1.2 Possible lower cost of capitalfor EU banks andbancassurance groups5.1.3 Increased competition in theEU banking sector from lifeinsurers5.2 Potential negative outcomes5.2.1 Two potential negativeconsequences in theshort term5.2.2 Two potential negativeoutcomes in the medium termfor the EU banking al impact of Solvency II on financial stabilityJuly 20073

46 CONCLUSION407 REFERENCES428 APPENDIX8.1 Appendix 1: Charts8.2 Appendix 2: Statistical tables8.3 Appendix 3: Further econometricresults474748ECBPotential impact of Solvency II on financial stabilityJuly 200755

EXECUTIVE SUMMARYSolvency requirements for EU insuranceundertakings are currently guided by the socalled Solvency I system, which sets marginsand absolute minimum capital requirementsthat are based on claims and technical reserves.As this system has been perceived as beinginsufficiently risk-based, the EuropeanCommission has proposed a revision to thesolvency standards for EU insuranceundertakings under the so-called Solvency IIproject. The new requirements will addressconcerns about the current system by placinggreater emphasis on an economic approach tothe valuation of the risks in insurers’ balancesheets. The formal proposal for the Solvency IIDirective is scheduled for July 2007, withimplementation by Member States expected byaround the end of 2010. The key objectives ofSolvency II are to enhance the protection ofpolicyholders, to deepen the integration ofthe EU insurance market, and to improvethe competitiveness of European insurers.Solvency II also aims at fostering consistencyof prudential supervisory and regulatoryrequirements across financial sectors (banksand insurers) in Europe, and it will represent astep towards greater harmonisation of nationallegislation and convergence of supervisorypractices. The new system will cover life,non-life and reinsurance companies and, likeBasel II for banks, it will have a three-pillarstructure. The European Central Bank wasinvited by the Commission to prepare a reportanalysing the possible consequences of the newregulatory regime for financial stability. Thisreport is designed to meet this request.Although the analysis contained in this reportidentifies a number of areas where there ispotential for risks to financial system stabilityto develop during the transition phase inimplementing Solvency II and afterwards, it isimportant to emphasise that the overallassessment is that the new risk-based capitalrequirement system will most likely make apositive and lasting contribution to EU financialsystem stability. As regards the risks identified,EXECUTIVES U M M A RYsome relate to the insurance sector directly. Thereport also draws attention to the fact thatbecause the EU insurance sector is sizeable andbecause it has growing linkages with thebanking system and financial markets, SolvencyII has the potential to affect other parts of thefinancial system, beyond the insurance sector.Potential impact of Solvency II on the insurancesector: One of the main positive expectedoutcomes from Solvency II is an enhancementof protection of policyholders, which should beachieved by improving the financial strengthand resilience of the European insuranceindustry. Solvency II should foster better riskmanagement by recognising risk diversificationand mitigation benefits. In enlarging thespectrum of eligible elements for regulatorycapital, it should provide EU insurers withincentives to optimise their capital structures.The increased use of securitisation, subordinateddebt and hybrid capital as funding sourcesshould, together with the harmonisation ofbalance sheet valuation practices across EUcountries, bring a higher level of transparency,allow regulatory capital to be raised at a lowercost, and increase the capacity of the EUinsurance sector to underwrite risk. Pressurefor financing of future growth throughacquisitions will, for example, be eased. With alower cost of capital and a resulting boost inprofitability, together with enhanced efficiency,it is expected that there will be improvementsin the long-term return on capital forshareholders and the competitiveness of theEuropean insurance industry. Althoughcompetition among European insurers in theirhome markets could intensify, theircompetitiveness vis-à-vis insurers outside theEU should improve significantly.These positive implications notwithstanding, itcannot be ruled out that in seeking a higherlevel of efficiency, Solvency II may lead tosome stresses in the short term. Relativelyinefficient insurance firms that are unable toeither implement adequate risk managementtools or invest in financial and human resourcescould be forced to exit the market. As aECBPotential impact of Solvency II on financial stabilityJuly 20075

consequence, risk premiums could risetemporarily and greater income volatility couldalso prevail in the medium term owing to theintroduction of new market-based valuationrules for assets and liabilities, coupled withmore risk-responsive capital requirements.Furthermore, the reinsurance sector maypotentially become more vulnerable in the newregime as Solvency II might lead to a higherconcentration of risk in re-insurers’ balancesheets and to a higher preponderance of ratingtriggers 1 being included in reinsurancecontracts. This may expose re-insurers tosignificant liquidity risk on the liability side. Ifsuch a development were to occur, it would beproblematic for financial stability as thereinsurance sector could possibly become asource of systemic risk. However, this risk maybe dampened somewhat if primary insurerschoose the best rated re-insurers to limit theircredit risk exposures and/or securitisereinsurance recoverables. In addition, reinsurers could also resort to securitisation totransfer risks to capital markets in order toreduce the expected rising concentration of riskin their balance sheets.Potential impact of Solvency II on financialmarkets: The impact on financial markets islikely to be fairly limited. On the positive sideit may provide some impetus for furtherdevelopment of the European corporate bondmarkets because it is likely to incite EU insurersto invest more in long-term bonds, includingcorporate securities. This should contributepositively to the size, liquidity and depth of theEuropean corporate bond market. Furthermore,the expected enlargement of eligible elementsfor inclusion in regulatory capital to a greaterspectrum of subordinated and hybrid debt couldalso help in promoting the development of thiscorporate market segment and in improving itsefficiency. While some risks can be identified,for instance the possibility of portfolioreallocation, they appear manageable, especiallyin the short term. An econometric analysisshows that there is already some evidencethat anticipation of the implementation ofSolvency II has fostered some portfolio6ECBPotential impact of Solvency II on financial stabilityJuly 2007reallocations out of equities toward bonds insome countries and that this has occurred in asmooth and gradual way. In other countries, theoverall effect of Solvency II has been to dampeninvestment risk, for instance by limiting furthergrowth in equity holdings despite strong stockmarket performance.In the medium term, traditional issues related torisks of herding behaviour may appear, as therisk-based Solvency II system has the potentialto amplify adverse financial market dynamics,whereby a large number of insurers may beforced to sell assets at times of financial stressin order to meet regulatory capital requirements.In addition, a greater number of financialinstitutions could adopt common risk modellingframeworks, which might potentially amplifycommon behaviours in financial markets.However, the supervisory approach ofSolvency II, based on both the minimum capitalrequirements and the solvency capitalrequirements, may limit such effects.Potential impact of Solvency II on the bankingsector: There are three main possible positiveconsequences for the EU banking sector, whichare related to reduced regulatory arbitrageopportunities, the potential for a lower costof capital and to likely higher competitionfrom EU life insurance undertakings. First,Solvency II will promote both convergencebetween regulatory and supervisory regimes forbanks and insurance companies in Europe andcross-sector supervisory consistency. This islikely to reduce existing scope for regulatoryarbitrage opportunities significantly and thuslessen the incentives to transfer credit risk frombanks’ balance sheets to the insurance sector.As a result, inefficiencies in the allocation ofcapital across financial sectors will most likelybe reduced. Second, because Solvency II isexpected to provide EU insurers with greaterincentives to invest in long-term bonds, banks,1A rating trigger can be defined as “any clause in a contract oragreement between two parties that allows one party to takeprotective action against deteriorating creditworthiness of theother party once a pre-determined rating threshold isbreached.”

being the most important issuers of long-termcorporate bonds in Europe, are likely to benefitfrom greater demand from insurers. This couldput downward pressure on the credit spreads ofbonds issued by banks, thereby reducing thecost of capital. Third, a shift towards theissuance of unit-linked products by life insurersmay intensify competitive pressures in thebanking sector, as unit-linked products that areindexed to the performance of stock or bondmarkets share many features with savingsproducts that are offered by banks. This shouldbe seen as positive from a financial stabilityviewpoint as competitive pressures may ensurea certain level of efficiency in the mediumterm.However, two main risks for the EU bankingsystem may be identified: credit risks and risksassociated with cross-holdings of securitiesbetween the banking and insurance sectors.Concerning credit risk, this could rise if theexpected reduction in regulatory arbitrageopportunities were sufficient to lead to aretrenchment of insurers from the credit risktransfer (CRT) markets. This would mean thatbanks may be faced with fewer counterpartieswilling to bear long credit risk exposures. Whileit cannot be excluded that the hedge fund sectorcould step in, greater exposure of EU banks tothis unregulated and rather opaque sector couldstill leave banks with greater credit risk. Highercredit risk may also come if household balancesheets were to become more sensitive to assetprice swings. This could occur if life insurersattempt to seek capital relief by shifting theirtraditional life policies with guaranteed returnsto unit-linked products, for which negligiblecapital requirements are required, as investmentrisk is fully borne by policyholders for thebulk of these products. As households may notbe fully aware of the nature and scale of therisks they face, they may not take optimalsaving decisions, and their balance sheets maybecome increasingly sensitive to asset pricevolatility. This could prove a source ofadditional credit risk for the banking sector if itwere to affect the balance sheets of low-income,highly indebted households. This risk could beEXECUTIVES U M M A RYmitigated if structured unit-linked products thatencompass some embedded guarantees forpolicyholders become widely sold in the run-upto Solvency II.As regards the second source of risk for banks,the expected higher issuance of subordinateddebt and hybrid capital in Solvency II mightincrease cross-holdings of securities betweenEU banks and insurers. In addition to crossholdings of equities, banks and insurers may beincreasingly inclined to hold more of eachother’s subordinated debt. Systemic risk couldincrease under such circumstances since thebankruptcy of a bank or an insurer woulddirectly impinge on the other sector, throughenhanced market price interdependenciesbetween EU insurers and banks.ECBPotential impact of Solvency II on financial stabilityJuly 20077

1INTRODUCTIONThe European Commission (EC) has revisedthe solvency standards for EU insuranceundertakings under the so-called Solvency IIproject. The formal proposal for theSolvency II Directive is scheduled for July2007, with implementation by Member Statesexpected around the end of 2010. The keyobjectives of Solvency II are to enhance theprotection of policyholders, to deepen theintegration of the EU insurance market, and toimprove the competitiveness of Europeaninsurers. Solvency II also aims at fosteringconsistency of prudential supervisory andregulatory requirements across financial sectors(banks, insurers and investment firms) inEurope, and will represent a step towardsgreater harmonisation of national legislationand convergence of supervisory practices.The new risk-based solvency regime willrely strongly on an economic approach for thevaluation of risks in insurers’ balance sheets.As this is in line with ongoing practices ofinsurers to manage risk and economic capital,any distortion from the new regulation may beexpected to remain limited. By contrast, in thecurrent Solvency I system, solvency marginsand absolute minimum capital requirements arebased on claims and technical reserves and aretherefore perceived as insufficiently risk-based.The new system will cover life, non-life andreinsurance companies, and like Basel II forbanks, will have a three-pillar structure.The three pillars of Solvency II: The new systemwill cover life, non-life and reinsurancecompanies, and will have a three-pillar structurein the same way as Basel II does for banks. Thefocus of Pillar 1 is to create a more risk-sensitiveand risk-responsive capital requirementssystem. This pillar will contain two quantitativecapital requirements: the Solvency CapitalRequirement (SCR) and the Minimum CapitalRequirement (MCR). The SCR reflects a levelof capital that ensures that significant unforeseenlosses can be absorbed over a one-year horizonwith a ruin probability of 0.5%. The MCR8ECBPotential impact of Solvency II on financial stabilityJuly 2007reflects the capital threshold below whichsupervisors would take immediate action. WhileBasel II only covers risks arising from the assetside (credit and market risks), together with theoperational risk within Pillar I, Solvency II willcover a larger range of quantifiable key risks.In addition to the risks covered in Basel II, itwill take into account risks on the liabilitiesside, such as mortality, longevity and catastropherisks, as well as for risks arising from theinteraction between assets and liabilities (assetliability management (ALM) risk). 2 Internalmodels that are used by large insuranceundertakings to manage risk and capital will berecognised under Pillar I.Pillar 2 will encompass supervisory activities.The key objective of this pillar is to strengthenthe harmonisation of supervisory methods, toensure consistency between the financialsectors, and to foster sound risk managementand governance by providing a qualitativeassessment of capital requirements and risksthat have not been accounted for underPillar I.Finally, Pillar 3 will be devoted to supervisoryreporting and public disclosure, and will aim atreinforcing risk-based supervision and marketdiscipline. The required information shouldenable an assessment of the solvency andfinancial condition of EU insurers both on asolo and on a group level, on an annual basis atleast, and will increase transparency in theEuropean insurance industry. The improvedcapacity of market participants to makeinformed decisions and to monitor companieswill provide insurers with a strong incentive tomanage risk and capital in a sound manner andto maintain an adequate capital position.Insurance and financial stability: This reportseeks to analyse the possible consequences of2The SCR will cover market risk (interest rate risk, equity risk,property risk, spread risk, market risk concentration andcurrency risk), credit risk, operational risk, and non-lifeunderwriting risk (non-life premium and reserve risk and nonlife catastrophe risk) and life underwriting risk (mortality risk,longevity risk, disability-morbidity risk, life expense risk, lapserisk and life catastrophe risk).

1the new regulatory regime on financial stabilityfollowing a request by the Commission to theEuropean Central Bank (ECB). The ECBdefines financial stability as “a condition inwhich the financial system – comprising offinancial intermediaries, markets and marketinfrastructures – is capable of withstandingshocks and the unravelling of financialimbalances, thereby mitigating the likelihoodof disruptions in the financial intermediationprocess which are severe enough to significantlyimpair the allocation of savings to profitableinvestment opportunities” (ECB, 2006a). Theinsurance sector, as a component of the financialintermediaries matters for the stability of thefinancial system. Through its function offinancial intermediation, it allows savings to beallocated more efficiently to investmentopportunities; its core function of riskmitigation/risk diversification tends to reducethe overall level of risk in the economy; whileits increasing role in the transfer of longevityand credit risk contributes to better riskallocation/risk-sharing in the economy. On theother hand, via its growing linkages with thebanking sector and financial markets, theinsurance industry is increasingly viewed as apotential source of vulnerability for financialstability. The new regulatory regime for EUinsurance undertakings might therefore haverepercussions on the EU insurers, and also,albeit to a lesser extent, on the EU bankingsector and the financial markets as well.Although the most probable consequences ofthe implementation of Solvency II are likely tobe positive for financial stability, some risksand vulnerabilities may not be ruled out.The remainder of the report is structured asfollows. The role that the insurance sector playsfor financial stability, both positive andnegative, is examined in Section 2. The impactof Solvency II on the EU insurance industry, onthe capital markets and on the EU bankingsector is assessed in Sections 3, 4 and 5. Themain conclusions of this report can be found inSection 6.ECBPotential impact of Solvency II on financial stabilityJuly 20079I N T RO D U C T I O N

2ROLE OF THE INSURANCE SECTOR FORFINANCIAL STABILITY2.1THE POSITIVE ROLE OF INSURANCE FORFINANCIAL STABILITY: THE THREE MAINCHANNELSInsurers provide three main services that arerelevant from a financial stability perspective:financial intermediation, risk diversification/risk mitigation, and risk transfer. These mainfunctions contribute to strengthening theresilience of the financial system by ensuringan efficient allocation of capital and riskswithin the economy.2.1.1 THE FINANCIAL INTERMEDIARY FUNCTIONAND THE EFFICIENT ALLOCATION OFCAPITAL IN THE ECONOMYInsurance companies contribute to an efficientallocation of capital in the economy throughtheir function of financial intermediation. Lifeinsurers mobilise long-term savings fromhouseholds through the sale of products such asannuities, unit-linked products or traditionallife policies with guaranteed returns. 3 As aresult, the liabilities of insurers’ balance sheetstypically display rather long-term maturitieswith high durations. To reduce the traditionalnegative duration gap of insurers’ balancesheets (i.e. higher duration liabilities thanassets), ALM requires investment with longmaturities. Owing to this long temporal view,life undertakings have the potential to becomea more stable source of funding for the corporatesector compared to bank lending, which is morecyclical. This also explains why insurers areoften considered to be one of the most stablesegments of the financial system when comparedwith banks or hedge funds. In periods of financialturmoil or recession, insurers might act as shockabsorbers in maintaining or increasing theirfinancing to corporations, thereby smoothingthe consequences of credit cycles. Furthermore,thanks to economies of scale in their access tofinancial markets and reduced transaction andinformation costs, insurers provide theirpolicyholders/shareholders with a better risk/return trade-off (FSA, 2006).10ECBPotential impact of Solvency II on financial stabilityJuly 20072.1.2 RISK DIVERSIFICATION AND RISKMITIGATION AND REDUCTION IN THEOVERALL LEVEL OF RISKRisk diversification and risk mitigation are thecore economic functions of insurancecompanies, and contribute to lowering theoverall level of risk in the economy. Riskdiversification in the insurance sector generallyrefers to diversification within types of risk,across types of risk (e.g. insurance versus creditrisk), across locations and across entities. 4 Inpooling risks of many policyholders andensuring that uncorrelated – idiosyncratic –risks are diversified, the insurance industryallows some risks to be eliminated. Thismutualisation of risk enables financial lossesassociated with insured events to be spreadamong a large number of policyholders.Potential diversification benefits withinbancassurance groups or financial conglomeratesare also possible owing to the different riskprofiles of insurance and bank entities (Rules,2001a; Darlap and Mayr, 2006). 5Risks that cannot be diversified away – socalled systematic risk – can only be reducedthrough risk mitigation techniques. Riskmitigation refers to the use of financialderivatives, of securitisation – such ascatastrophe or mortality bonds that are used to345In the non-life insurance sector, the intermediation function isonly incidental and results from the collection of premia inadvance of claim payments (Cummins and Rubio-Misas, 2001).It is reflected in the difference between the rate of return on theassets and the rate credited to the policyholders.There is also an intertemporal risk diversification, as non-lifeinsurers usually build up equalisation reserves to dampen theeffects of infrequent natural catastrophe events on their balancesheets, which tends to smooth the rates of return over timefor policyholders and shareholders (Häusler, 2003). Theimplementation of the International Financial ReportingStandards (IFRS) from 2005 onwards should limit the use ofsuch reserves.See Slijkerman, Schoenmaker and de Vries (2005) for therationale behind the recognition of diversification benefitswithin a financial conglomerate. If the downside dependencebetween a bank and an insurer distinctly differs from thedependence structure between two banks or between twoinsurers, financial conglomerates might require less capitalcharges than large banks or insurance companies. Hence, capitalrequirements for financial conglomerates could be set below thesum of the capital requirements for the banking and theinsurance parts. A study by Oliver, Wyman & Co. (2001)suggests that there is scope for a 5-10% reduction in capitalrequirements for a combined bank/insurance company.

2transfer risk to capital markets – and ofreinsurance, which transfers risks from primaryto reinsurance companies and from reinsurersto retrocessionaires. 6 All these transfers of riskallow better risk-sharing within the insurancesector and financial markets.Regarding risk mitigation techniques, the useof reinsurance appears key as it provides asafety net for the primary insurance industry.Reinsurance companies typically absorb themost volatile part of the risk corresponding topeak exposures, i.e. the risk of huge lossesarising from events occurring with a lowprobability, which primary insurers do not wantto keep in their balance sheets. By poolinginsurance risk, reinsurance firms can achieve asuperior diversification of risks, both in termsof business lines and geographically. Hence,after a catastrophe event, they are better able toincur the losses that are transferred fromprimary insurers. As a result, risks and capitalare better managed in the insurance industry,making the primary insurance sector moreresilient. The residual risk that is not diversified,transferred to other institutions or shifted to thefinancial markets is borne by the shareholdersof insurance companies and possibly also bypolicyholders, for example through theirholding of with-profit life policies.Chart 1 Net position in CRT of banks2.1.3 THE WIDER ROLE OF THE INSURANCESECTOR IN THE TRANSFER OF RISKSWITHIN THE ECONOMYThe insurance sector may also strengthen theresilience of the banking sector via its recentinvolvement in credit risk transfer (CRT)markets, and could contribute to a betterallocation of risks within the economy via itsgrowing role in the transfer of longevity risk.Role of insurance in the CRT market: The risksfaced by the insurance sector are not perfectlycorrelated with the risks faced by the bankingsector, which means that there is thereforescope for risk diversification. The significanttransfer of credit risk from banks to insurers inrecent years has allowed a reduction in theconcentration of banks’ exposures and riskdiversification beyond banks’ customer base(Rule, 2001b). This has thereby contributed toimproving the ability of the banking sector towithstand adverse credit disturbances, as bankcrises often arise from a significant concentration6Reinsurers rarely keep all of the risks they underwrite. Typically,they transfer most of the risk they do not want to bear to otherreinsurance undertakings participating in the retrocessionmarket, known as retrocessionaires, while only a small fractionof the risk is spread to financial markets throughsecuritisation.Chart 2 Net position in CRT of insurersbuyers of credit protectionsellers of credit protectionbuyers of credit protectionsellers of credit 15153030202010101010550002000200220042006Source: British Bankers’ Association (BBA).Note: Figures for 2008 are forecasts.2008200020022004200620080Source: British Bankers’ Association (BBA).Note: Figures for 2008 are forecasts.ECBPotential impact of Solvency II on financial stabilityJuly 200711RO L E O F T H EINSURANCES E C TO RFOR FINANCIALS TA B I L I T Y

of credit risks vis-à-vis borrowers that arevulnerable to the same shocks (Häusler, 2005).The cyclicality of banks’ financial conditionhas been dampened over the last credit cycle inthe US and in Europe, where the bankingsystems have proven to be more resilient, partlydue to the spreading of credit losses betweenfinancial institutions (BIS, 2004). Althoughmost credit risk transfers have occurred betweenbanks (e.g. from large to small European andAsian banks), the banking sector as a whole isa net buyer of credit protection, i.e. the bankshave ceded part of their credit risk to otherfinancial institutions (see Chart 1). Up until2004, the insurance sector absorbed the largestpart of credit risk from banks through its highnet selling position of credit protectioninstruments (IMF, 2004; BBA, 2006; seeChart 2).Role of insurance in the transfer of longevityrisk: The ongoing pension scheme reforms inEurope towards less generous public fundinghave put more emphasis on private savings andon life insurers and pension funds that managea larger proportion of households’ savings (BIS,2006). In 2005 more than 28% of the financialwealth of euro area households, and over 11%of their total wealth, was invested in pr

transfer risks to capital markets in order to reduce the expected rising concentration of risk in their balance sheets. Potential impact of Solvency II on financial markets: The impact on financial markets is likely to be fairly limited. On the positive side it may provide some impetus for further development of the European corporate bond

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