Institutions in Crisis

Institutions in Crisis

European Perspectives on the Recession

New Thinking in Political Economy series

Edited by David Howden

This critical and thought-provoking book explores the causes and consequences of Europe’s failed political and economic institutions. Europe’s recession has created new challenges as market turmoil has shaken the foundations of the twin pillars of the new drive for European integration – political and monetary unions. This book critically assesses the patchwork solutions continually offered to hold the troubled unions together. Failed political policies, from the prodigious ‘Common Agricultural Policy’ to ever more common fiscal stimulus packages, are shown to have bred less than stellar results in the past, and to have devastating implications for future European growth. The contributors outline the manner through which European monetary union has subsidized and continues to exacerbate the burgeoning debt crisis. Most strikingly, the interplay between Europe’s political and economic realms is exposed as the boondoggle it is, with increasingly bureaucratic institutions plaguing the continent and endangering future potential.

Chapter 6: Solvency II and the European Sovereign Debt Crisis: The Case of Misplaced Prudence

Antonio Zanella

Subjects: economics and finance, austrian economics, political economy, politics and public policy, political economy


Antonio Zanella Insurance and reinsurance firms operating in the European Union are regulated by the European Commission through the Committee of European Insurance and Occupational Pensions Supervisors (CEIOPS). Since November 2003 the CEIOPS has strived to imitate the European banking system’s regulatory framework (the Basel requirements) by a regulatory standard called the Solvency Requirements. Three fundamental pillars form the base of this new standard: risk measurement and regulatory capital calculation; governance and supervision requirements; and information transparency (Ayadi, 2007). In order to improve the solvency and liquidity of the insurance market the European Commission developed a parallel standard very similar to the Basel Accords: the Solvency Capital Requirements. Solvency margin requirements have been in place since the 1970s, but in 2002 a limited reform was agreed by the European Parliament, with the main objectives of protecting policyholders and ensuring a level playingfield between insurance undertakings in the EU (Ayadi, 2007, p. 12). This reform, called Solvency I, did not fundamentally change the capital requirements established by the previous system and therefore discussions for a new and wider reform proposal soon began, Solvency II. Having been successfully approved by the European Parliament on 22 April 2009, the new changes will take effect on 1 January 2013 as these regulatory requirements enter their second phase: Solvency II. The Solvency Capital Requirement (SCR) is the primary tool that Solvency II has to reach its stability objective. The SCR is the capital  that an insurance company needs to survive potential losses resulting from an...

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