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Should the insurance industry be banking on risk escalation for solvency II?

Bryce, Cormac; Webb, Robert; Cheevers, Carly; Ring, P.; Clark, G.

Authors

Cormac Bryce

Robert Webb

Carly Cheevers

P. Ring

G. Clark



Abstract

Basel II introduced a three pillar approach which concentrated upon new capital ratios (Pillar I), new supervisory procedures (Pillar II) and demanded better overall disclosure to ensure effective market discipline and transparency. Importantly, it introduced operational risk as a standalone area of the bank which for the first time was required to be measured, managed and capital allocated to calculated operational risks. Concurrently, Solvency II regulation in the insurance industry was also re-imagining regulations within the insurance industry and also developing operational risk measures. Given that Basel II was first published in 2004 and Solvency II was set to go live in January 2014. This paper analyses the strategic challenges of Basel II in the UK banking sector and then uses the results to inform a survey of a major UK insurance provider. We report that the effectiveness of Basel II was based around: the reliance upon people for effective decision making; the importance of good training for empowerment of staff; the importance of Board level engagement; and an individual's own world view and perceptions influenced the adoption of an organizational risk culture. We then take the findings to inform a survey utilizing structural equation modelling to analyze risk reporting and escalation in a large UK insurance company. The results indicate that attitude and uncertainty significantly affect individual's intention to escalate operational risk and that if not recognized by insurance companies and regulators will hinder the effectiveness of Solvency II implementation.

Journal Article Type Article
Publication Date Jul 1, 2016
Journal International Review of Financial Analysis
Print ISSN 1057-5219
Electronic ISSN 1057-5219
Publisher Elsevier
Peer Reviewed Peer Reviewed
Volume 46
Pages 131-139
APA6 Citation Bryce, C., Webb, R., Cheevers, C., Ring, P., & Clark, G. (2016). Should the insurance industry be banking on risk escalation for solvency II?. International Review of Financial Analysis, 46, 131-139. https://doi.org/10.1016/j.irfa.2016.04.014
DOI https://doi.org/10.1016/j.irfa.2016.04.014
Keywords Operational risk; Risk escalation; Risk regulation; Basel II; Solvency II
Publisher URL http://www.sciencedirect.com/science/article/pii/S1057521916300758
Copyright Statement Copyright information regarding this work can be found at the following address: http://creativecommons.org/licenses/by/4.0
Additional Information This article is maintained by: Elsevier; Article Title: Should the insurance industry be banking on risk escalation for solvency II?; Journal Title: International Review of Financial Analysis; CrossRef DOI link to publisher maintained version: https://doi.org/10.1016/j.irfa.2016.04.014; Content Type: article; Copyright: © 2016 The Authors. Published by Elsevier Inc.

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Copyright Statement
Copyright information regarding this work can be found at the following address: http://creativecommons.org/licenses/by/4.0





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