Equity risk at the horizon

Some Solvency II stakeholders argue that equity risk declines over time and consequently should lead to lower regulatory capital. This paper analyses two methodologies and demonstrates that equity risk rather increases over time, thereby rejecting the stakeholder claim

Solvency II is a key project of the European Commission (EC). It will replace the current European insurance directives (Solvency I) and aims to establish a risk-based solvency framework for the European insurance market. In its framework for consultation on Solvency II the EC proposes to calibrate all quantifiable risks on a one-year time horizon.1 It reflects the envisaged role of capital in Solvency II as a buffer against unexpected losses on a relatively short-term horizon. Adequate