This thesis introduces various approaches to natural catastrophe risk assessment in (re)insurance environment. Most emphasis and further elaboration is put on probabilistic models in comparison to the standard model as proposed by Solvency II. The outcomes of natural catastrophe modeling play an important role in the design of proper actuarial models related to catastrophe risk. More specifically it is shown that they can be entirely understood in a wider actuarial context, namely risk theory. Within the Solvency II framework, probabilistic model outcomes are translated by means of the proposed decomposition methodology putting them into a similar language of the standard formula in order to create the ability to compare different results implied by either probabilistic model or standard formula. This enables both comparison of the implied dependence structure of probabilistic model to standardized correlations assumed in Solvency II, and scenario year loss factors of Solvency II to implied damage factors of probabilistic models in defined cresta zones. The introduced decomposition methodology is illustrated by flood and windstorm model outcomes calculated on exposure data of Czech insurance companies and compared to the respective standard formula parameters and outcomes. Finally, other applications of the proposed decomposition methodology are introduced, such as measurement of diversification effect or blending of different results calculated by different models or even approaches to natural catastrophe risk assessment.

The thesis is focused on finding the most appropriate method for constructing the yield curve which will meet the criteria of Solvency II and also the selected evaluation criteria. An overview of advantages of each method is obtained by comparing these methods. Yield curves are constructed using the Czech interest rate swap data from 2007 to 2013. The selection of the evaluated methods respects their public availability and their practical application in life insurance or central banks. This thesis is divided into two parts. The first part describes the theoretical background which is necessary to understand the examined issues. In the second part the analysis of selected methods was carried out with detailed evaluation.

This thesis investigates the impact of Solvency II on the asset side of Swedish mutual life insurers. With the help of a quantitative analysis and a qualitative examination of our results we find that there will be a significant change in demand for certain products. A substantial increase in demand for government bonds and interest rate swaps with long maturities should be expected. Furthermore, both corporate and covered bonds will be more attractive investments under the new regulatory framework. Another big impact is the lower risk-adjusted return for equity, which over time will lead to a reduction in Swedish life insurers’ relatively high exposure to equity and equity based products. Furthermore, we conclude that there are large gains to be made by incorporating an optimization with regard to the solvency capital requirements dictated by the legislative texts. / Denna uppsats har undersökt vilken inverkan Solvens II kommer ha på svenska ömsesidiga livbolags tillgångssidor. Med hjälp av en kvantitativ analys och en kvalitativ undersökning av våra resultat har vi funnit att det kommer ske en betydande förändring i efterfrågan av vissa instrument. En stor ökning på efterfrågan av statsobligationer och ränteswappar med långa löptider är att vänta. Dessutom kommer både företags- och säkerställda obligationer vara betydligt mer attraktiva investeringsalternativ under det nya regelverket. En annan stor inverkan är den lägre riskjusterade avkastningen för aktier och aktierelaterade produkter. Över tid kommer detta sannolikt leda till en reduktion av svenska livbolags relativt höga exponering har gentemot aktier. Därutöver finner vi att bolagen har mycket att vinna på att införliva en optimering med avseende på de av regelverket angivna kapitalkraven.

The financial sector stands for an important part of society’s fundamental infrastructure andnational economy. Previous financial crises indicate the importance of having a well-regulatedfinancial market. Former directives of regulating the insurance industry had insufficient solvencyregulations and were lacking in risk management. Therefore, the regulatory framework SolvencyII, the successor to Solvency I, has been established on the European market. The objective ofSolvency II is to ensure consumer protection by ensuring insurance companies properly reflectthe risks their businesses are vulnerable to.The regulatory framework Solvency II came into force in the turn of 2015/2016. However, it hasbeen on every insurers’ agenda for years and preparations have been done. It is therefore ofinterest to investigate how Swedish insurance companies have adjusted to Solvency II at an earlystage after the transition.This has been investigated by conducting interviews with mainly Chief Risk Officers and RiskManagers at Swedish insurance companies. As a complement, a questionnaire was distributed toasset 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 adoptthe regulation rather than a business focus. No indications of adjustments to corporate businessstrategy has yet been noticed. However, some companies have developed a risk culture withinthe organizations. The extensive reporting and calculations of capital that Solvency II entails, haslead to implementations of new systems and processes for companies. It is further noticed thatSwedish 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 returnby holding a risk-adjusted capital. Also, an increased engagement of employees in the riskmanagement process has been noticed. The companies are aligned with the ORSA process, sinceit is one of the requirements, and are aware of the potential benefits the ORSA process cancontribute to. Lastly, this study indicates an improved risk awareness and culture within theinsurance companies by educating existing employees and employing new competentemployees.

Detta examensarbetes syfte var att undersöka möjligheter till förbättring av hantering av lagernivåer för Bygg Ole Saltsjö-Boo. En kombination av aspekter från både systemteknik och industriell ekonomi har använts. I rapporten applicerades Guaranteed Service-Level modellen baserad på historisk försäljning i kombination relevanta teorier om lagerkostnad. Rapporten var begränsad till att behandla utvalda produkter med hög omsättning från två utvalda leverantörer till Bygg Ole. Efterfrågan för alla produkter i rapporten utom en är icke säsongsberoende. Särskild hänsyn har dessutom tagits till servicenivå, kapitalkostnader och variation i efterfråga. Resultatet gav att en implementering av modellen skulle ge lägre lagernivåer och därmed lägre lagerkostnader. Slutsatsen från rapporten var att modellen skulle kunna implementeras, eventuellt med höga administrativa kostnader i början. Bygg Ole har också en möjlighet att använda ett ordersystem baserat på den matematiska GSL-modellen (Guaranteed Service-Level) i kombination med prognoser över efterfrågan producerade av försäljningsavdelningen på Bygg Ole. Detta skulle potentiellt kunna öka precisionen i lagerhanteringen. Den nuvarande lagerräntan är relativt lågt bestämd och därför minskas de beräknade besparingarna från implementering av modellen. Om lagerräntan skulle vara högre skulle den ekonomiska fördelen med implementeringen vara tydligare. Rekommendationen till Bygg Ole är att tillämpa den rekommenderade GSL-modellen i kombination med ett system för prognos över efterfrågan på några utvalda produkter och sedan utvärdera resultatet. / The aim of this thesis was to examine possible improvements in the inventory management and procedure of ordering at Bygg Ole Saltsjö-Boo. A combination of aspects from both Systems Engineering and Industrial Engineering and Management has been used. In the report, a Guaranteed Service-Level model based on historical data of sales in combination with relevant theories about inventory carrying cost has been applied. The study was limited to specific chosen products with high sales from two selected suppliers of Bygg Ole. All these products in the study except one experienced low seasonal variety in demand. Furthermore special consideration was taken to service level, cost of capital and variability of demand. The result was that an implementation of the model would yield lower inventory levels and therefore lower carrying costs of inventory. The conclusion from the report was that the model could be implemented, although with possibly high administrative costs in the beginning. Bygg Ole also has a possibility of using an ordering system based on the mathematical GSL-model (Guaranteed Service-Level) in combination with forecasts of demand conducted by the sales department of Bygg Ole. This could potentially increase precision in the inventory management. The current inventory carrying charge is compounded relatively low and therefore decreases the calculated savings from implementing the model. If the carrying charge would be higher, the benefits of implementation would be more evident. The recommendation for Bygg Ole is to apply the recommended GSL-model in combination with a demand forecast planning system on a few selected products and then evaluate the result.

The Own Risk and Solvency Assessment, ORSA, is referred to as the heart of the regulation to be for European insurance companies - Solvency II. The aim of the ORSA process is to provide an overall and holistic view of the insurer’s risks by analyzing their current financial status and business strategy at hand. There is no predefined way to implement this process, which means that the companies are forced to develop a model themselves, as they see fit. In collaboration with a regional insurance company in Sweden we develop a structure and framework for an ORSA-model, flexible enough to be used by similar insurers yet standardized enough to overcome the issue of constrained resources within these smaller organizations. We apply a risk-factor based approach and tie together a balance sheet projection and stress testing, designed to be further developed as the individual insurer see fit. The suggested approach yields partially satisfying results and we consider the model to be particularly well-suited for assessing risk in the context of the small, non-life insurer. / Den egna risk- och solvensutvärderingen, ORSA, kallas hjärtat av det kommande regelverket för europeiska försäkringsbolag - Solvens II. Syftet med ORSA-processen är att ge en övergripande helhetsbild av försäkringsgivarens risker genom att analysera deras finansiella ställning och affärsstrategi. Det finns inget fördefinierat sätt att genomföra denna process, vilket innebär att företagen tvingas att utveckla en modell på egen hand, på ett sätt som de finner lämpligt. I samarbete med ett regionalt försäkringsbolag i Sverige utvecklar vi en struktur och en grund för en ORSA-modell. En modell som är tillräckligt flexibel för att kunna användas av liknande försäkringsgivare men samtidigt standardiserad nog att lösa problemet med begränsade resurser i dessa mindre organisationer. Vi tillämpar en riskfaktor-baserad metod, prognostiserar resultat- och balansräkning för bolaget och utför stresstester. Metoden är utformad för att utvecklas vidare av den enskilde försäkringsgivaren så som de finner lämpligt. Den föreslagna metoden ger delvis tillfredsställande resultat och vi anser att det är en grund väl lämpad att använda som utgångspunkt för att konstruera riskmätningsmetoder för små, skadeförsäkringsbolag.

The financial stability of the insurers is important to fulfil its role as a risk transfer mechanism and to protect the purchasers of their products. The European Union is introducing the Solvency II to modernise the current Solvency I regime and to harmonise the different insurance legislation of the members of the European Union. Solvency II introduces an architecture consisting of three pillars, with Pillar I setting the solvency capital requirements, Pillar II the governance and risk management requirements and Pillar III the reporting requirements. The South African Regulator initiated Solvency Assessment and Management for implementation in 2016 to align the South African prudential regulatory framework to meet the Solvency II requirements for third country equivalence. The problem that this study addressed is the possible effect that the introduction of Solvency Assessment and Management may have on the sustainability of short-term insurers in South Africa. The results of a empirical component of the study indicated that small and medium short-term insurers may be negatively impacted due to the costs incurred to implement and comply with the requirements of the new regulatory framework. The effect on the South African short-term industry can be that cover is concentrated among a few large short-term insurers. / Business Management / M. Com. (Business Management)

The financial stability of the insurers is important to fulfil its role as a risk transfer mechanism and to protect the purchasers of their products. The European Union is introducing the Solvency II to modernise the current Solvency I regime and to harmonise the different insurance legislation of the members of the European Union. Solvency II introduces an architecture consisting of three pillars, with Pillar I setting the solvency capital requirements, Pillar II the governance and risk management requirements and Pillar III the reporting requirements. The South African Regulator initiated Solvency Assessment and Management for implementation in 2016 to align the South African prudential regulatory framework to meet the Solvency II requirements for third country equivalence. The problem that this study addressed is the possible effect that the introduction of Solvency Assessment and Management may have on the sustainability of short-term insurers in South Africa. The results of a empirical component of the study indicated that small and medium short-term insurers may be negatively impacted due to the costs incurred to implement and comply with the requirements of the new regulatory framework. The effect on the South African short-term industry can be that cover is concentrated among a few large short-term insurers. / Business Management / M. Com. (Business Management)

Solvency II is the new European Union (EU) legislation which will replace the capital adequacy regime for the insurance industry. Considering that the banking sector has experienced a similar change through the different Basel Accords (Basel), there is an opportunity for the insurance industry before The results indicate similar distortions between developing countries while the major driver behind the cost of capital for developing countries is equity market volatility, and not credit risk as might have been expected. Finally, the fourth research problem relates to another objective of financial regulations: to reflect the risks that financial institutions face. The risk sensitivities of economic and regulatory capital for credit risk are investigated empirically using a dynamic optimisation model in one of the first studies of its kind. Results show that economic capital is a superior risk measure to regulatory capital from a systemic- and institution-specific risk perspective. This, along with calls to strengthen Pillar 2 disciplines following the financial crisis, leads to a suggestion that economic capital could be considered as a Pillar 1 capital requirement, replacing the current forms of Pillar 1 regulatory capital. the implementation of Solvency II to learn from the weaknesses and shortcomings in Basel to ensure that the design of Solvency II will, as far as possible, compensate for these. The financial crisis of 2007 to 2010 highlighted certain weaknesses and shortcomings of Basel and there is accordingly an opportunity for the insurance industry to learn from these deficiencies and to strengthen Solvency II to help prevent similar events in the insurance industry. This thesis investigates these weaknesses in Basel in an attempt to determine the extent to which these are inherently included in Solvency II. The first research problem of this thesis examines these weaknesses in Basel and relates them back to Solvency II to determine which, and to what extent, some of them may have been included in Solvency II. The second research problem leads from the first and critically explores an objective of financial regulations, namely to provide financial institutions with equal competitive conditions (the so-called ‘level playing field’) from a regulatory perspective. To achieve this objective, there is an implicit assumption that the cost of capital between countries is equal. Investigation into the cost of capital between both developed and developing countries using a modified weighted average cost of capital model indicates that the cost of capital between developed and developing countries differs and that regulations based on capital requirements tend to favour developed countries. This means that current financial regulations cannot achieve this objective as intended. The third research problem investigates the cost of capital between various developing countries to determine firstly whether similar competitive distortions exist among such countries, while secondly exploring the drivers behind the cost of capital in such countries through linear regression analyses. / PhD (Risk Management), North-West University, Potchefstroom Campus, 2013

Solvency II is the new European Union (EU) legislation which will replace the capital adequacy regime for the insurance industry. Considering that the banking sector has experienced a similar change through the different Basel Accords (Basel), there is an opportunity for the insurance industry before The results indicate similar distortions between developing countries while the major driver behind the cost of capital for developing countries is equity market volatility, and not credit risk as might have been expected. Finally, the fourth research problem relates to another objective of financial regulations: to reflect the risks that financial institutions face. The risk sensitivities of economic and regulatory capital for credit risk are investigated empirically using a dynamic optimisation model in one of the first studies of its kind. Results show that economic capital is a superior risk measure to regulatory capital from a systemic- and institution-specific risk perspective. This, along with calls to strengthen Pillar 2 disciplines following the financial crisis, leads to a suggestion that economic capital could be considered as a Pillar 1 capital requirement, replacing the current forms of Pillar 1 regulatory capital. the implementation of Solvency II to learn from the weaknesses and shortcomings in Basel to ensure that the design of Solvency II will, as far as possible, compensate for these. The financial crisis of 2007 to 2010 highlighted certain weaknesses and shortcomings of Basel and there is accordingly an opportunity for the insurance industry to learn from these deficiencies and to strengthen Solvency II to help prevent similar events in the insurance industry. This thesis investigates these weaknesses in Basel in an attempt to determine the extent to which these are inherently included in Solvency II. The first research problem of this thesis examines these weaknesses in Basel and relates them back to Solvency II to determine which, and to what extent, some of them may have been included in Solvency II. The second research problem leads from the first and critically explores an objective of financial regulations, namely to provide financial institutions with equal competitive conditions (the so-called ‘level playing field’) from a regulatory perspective. To achieve this objective, there is an implicit assumption that the cost of capital between countries is equal. Investigation into the cost of capital between both developed and developing countries using a modified weighted average cost of capital model indicates that the cost of capital between developed and developing countries differs and that regulations based on capital requirements tend to favour developed countries. This means that current financial regulations cannot achieve this objective as intended. The third research problem investigates the cost of capital between various developing countries to determine firstly whether similar competitive distortions exist among such countries, while secondly exploring the drivers behind the cost of capital in such countries through linear regression analyses. / PhD (Risk Management), North-West University, Potchefstroom Campus, 2013