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Solvency: Models, Assessment and Regulation.

Solvency: Models, Assessment and Regulation, by Arne Sandstrom, 2006, Chapman & Hall/CRC, Boca Raton, FL, pp. 433. ISBN: 978-1584885542

Solvency: Models, Assessment and Regulation is a timely and thorough historical analysis of the recent European work on solvency and financial strength, and related accounting issues, with particular emphasis on risk categorizations proposed by the International Actuarial Association. The book provides readers and prospective researchers with a veritable "Who's Who" of the numerous organizations intimately involved in the European Union (EU) solvency debate, and an understanding of the various EU directives that impact insurers, reinsurers, and financial conglomerates, as well as a comprehensive review of past, present, and (recommended) future steps needed to achieve more effective and efficient solvency regulation. The author, Arne Sandstrom, unquestionably succeeds, incorporating several detailed quantitative examples through a well-written and organized text.

The first main section of the book presents a historical perspective of the approaches, research, and theory underlying the initial directives for EU solvency and accounting, beginning with those undertaken among several member states of the predecessor European Economic Community (i.e., "Solvency 0"). The section chronicles the development of directives leading to the 1990s Solvency I, including the Basle I (1998) banking accords, and steps being taken and recommended toward more successful implementation of the currently proposed Solvency II regime. The first section concludes with a comparative review of the general framework of ideas, models, and solvency assessment systems used in six EU countries (Denmark, Finland, Germany, Netherlands, Sweden, and the United Kingdom), and six non-EU countries (Australia, Canada, Norway, Singapore, Switzerland, and the United States).

The second section develops a standardized model for life and nonlife solvency assessment for supervisory purposes, and corresponding financial reporting accounting, based upon technical provisions measuring a fair value best estimate of the distribution of stand-alone insurer total liabilities plus a solvency risk margin (market value margin). The prudent solvency margin is posited to entail a risk charge that covers both a hard minimum capital requirement and a higher soft solvency capital requirement, which are each dependent upon a full balance sheet approach using International Accounting Standards. These basic concepts are then expanded and explored in much greater technical detail, and a numerical illustration is provided.

The third main section extends the application and discussion of the theoretical concepts developed in the previous section from stand-alone company solvency assessment to groups, financial conglomerates, and reinsurance, as well as to internal models, forecasts, risk management, and stress-testing procedures. The final section provides detailed appendices including the basic theory of the standardized approach, excerpts from the various EU life, nonlife, reinsurance, groups and conglomerates directives, and principles and guidelines from the International Association of Insurance Supervisors. A thorough reference list is also provided.

Overall, the book offers a thorough and thoughtful discussion of the current state of evolution regarding solvency regulation, theory, and research in the EU. Policymakers, insurance academics, researchers, students, and other interested parties around the world may find this book highly relevant in understanding solvency models, formulation, assessment, and the debate over alternative strategies for reform. The book offers an objective overview of the issues that is understandable to both technical and nontechnical readers, as well as important insights into identifying the key players, theory, and application across diverse and potentially unfamiliar systems.

DOI: 10.1111/j.1539-6975.2009.01332.x

Reviewer: William L. Ferguson, The University of Louisiana at Lafayette;
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Author:Ferguson, William L.
Publication:Journal of Risk and Insurance
Article Type:Book review
Date:Dec 1, 2009
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