How External Requirements Affect the Insurance Industry



The financial sector stands for an important part of society’s fundamental infrastructure and national economy. Previous financial crises indicate the importance of having a well-regulated financial market. Former directives of regulating the insurance industry had insufficient solvency regulations and were lacking in risk management. Therefore, the regulatory framework Solvency II, the successor to Solvency I, has been established on the European market. The objective of Solvency II is to ensure consumer protection by ensuring insurance companies properly reflect the risks their businesses are vulnerable to.  The regulatory framework Solvency II came into force in the turn of 2015/2016. However, it has been on every insurers’ agenda for years and preparations have been done. It is therefore of interest to investigate how Swedish insurance companies have adjusted to Solvency II at an early stage after the transition. This has been investigated by conducting interviews with mainly Chief Risk Officers and Risk Managers at Swedish insurance companies. As a complement, a questionnaire was distributed to asset and capital managers, having insurers as customers, regarding their perception of insurers’ changes in investment behaviors.  The findings of this study imply that insurance companies have had a compliance focus to adopt the regulation rather than a business focus. No indications of adjustments to corporate business strategy has yet been noticed. However, some companies have developed a risk culture within the organizations. The extensive reporting and calculations of capital that Solvency II entails, has lead to implementations of new systems and processes for companies. It is further noticed that Swedish insurance companies use the standard model for calculating the capital requirements. Solvency II has lead to increased understanding of the trade-off between capital, risk, and return by holding a risk-adjusted capital. Also, an increased engagement of employees in the risk management process has been noticed. The companies are aligned with the ORSA process, since it is one of the requirements, and are aware of the potential benefits the ORSA process can contribute to. Lastly, this study indicates an improved risk awareness and culture within the insurance companies by educating existing employees and employing new competent employees.


As mentioned in the background, the financial crisis in 2008 demonstrated the consequences of a lack of risk-adjusted capital and risk management in the banking sector. Companies misjudged the amount of capital to hold to cover the risks. Similar tendencies were seen in the insurance industry and regulators had recognized inadequate solvency regulations and risk management before the emergence of the financial crisis in 2008. Solvency II aims to improve the risk management and capital hold by firms to cover their risk in order to prevent future financial crisis. The objectives are to enhance consumer protection and to promote financial stability. Many studies have investigated the effects of capital requirements. Some studies suggest that capital requirements have a positive effect on enhanced financial stability (e.g. Fiordelisi and Mare, 2013, Berger and Bouwman, 2013). However, some authors believe that regulatory frameworks are not efficient in enhancing the financial stability (e.g. Hakenes and Schnabel, 2011, Zhou, 2013). Economist Intelligence Unit (2012) argues that many insurance companies are critical to the regulations due to their perception of already having sufficient capital to cover their exposed risks. Siegel and Morbi (2015) confirm this stating that state most insurers perceive the industry to be over-capitalized or at least adequately capitalized. However, regulators have recognized a need to enhance consumer protection and financial stability by increased capital requirement to cover the risks and increased risk management (Buckham et al., 2010, Berger and Bouwman, 2013).  Insurance companies have been able to prepare for the implementation ever since 2009 when Solvency II was launched. The outcome of the implementation on their businesses becomes evident after the full implementation has occurred. The problem is that it is not known yet if Solvency II fulfills its objectives. Since the implementation of Solvency II was in the turn of the year 2015/2016, it is not known whether it creates enhanced financial stability and consumer protection by securing that insurance companies have assets to pay its policyholders within a contingency. Also, the capital required within Solvency II may not be sufficient to cover the losses from catastrophic events. 


The purpose of this study is to investigate how insurance companies have adjusted to Solvency II at an early stage after the transition. Since it has been required by European insurance companies to adopt these requirements, it is of interest to investigate how these adjustments have affected insurance companies. This study investigates impacts on business and organizations, adaption to the capital requirement, and effects to their risk management. In addition, opportunities and challenges within organizations due to Solvency II are investigated.  An additional purpose of this thesis is to investigate how insurance companies manages lowfrequency and high-impact risks in the context of Solvency II. Since the frequency of these catastrophes has increased (Rutberg, 2015, Klein, 2013), it is of interest to investigate how insurers manage this type of risks.