| Summary: | 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
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