Solvency II: Migrating capital regulation from banking to insurance

On January 1, 2016, a new European regulatory framework for the capital regulation of insurance companies commenced. Solvency II is a comprehensive risk-based capital regulation framework that outlines rules for the... [ view full abstract ]

On January 1, 2016, a new European regulatory framework for the capital regulation of insurance companies commenced. Solvency II is a comprehensive risk-based capital regulation framework that outlines rules for the calculation of regulatory requirements for insurance firms’ capital reserves. Surprisingly, this framework fairly resembles the risk-based Basel II framework that has been deployed for the capital regulation of banks. After the 2007-2008 financial crisis, this framework has become significantly discredited. It is widely considered as a failure for its lack of offering the means to mitigate the severity of the crisis. Additionally, some have even argued that the risk-based character of the framework strengthened the developments leading to the housing bubble. Why has a regulatory approach that is widely considered to have failed in banking now been adopted as the approach to the capital regulation of insurance companies? This paper discusses these developments in terms of ‘financialization’. In recent years, scholars have increasingly deployed this term to refer to the increasing importance of finance in contemporary societies. However, in this paper, I seek to broaden the concept of financialization in reference to the increasing prominence of financial mathematical thinking outside the context in which it has originally been developed. The migration of the regulatory approach importantly entails the migration of particular techniques of knowing risks and values that have sprung from the academic field of financial mathematics. As such, can we perceive of the above described surprising regulatory migration as an effect of the scientific appeal of the financial mathematical techniques involved? These techniques lend some obvious qualities. They lend an aura of objectivity, as well as that they promise to facilitate both internal and external processes of communication for insurance firms. But what are the implications of using such techniques for the financial governance of the insurance sector?