The risk-free conundrum

The risk-free conundrum

michael-faulkner

The eurozone debt crisis raises a fundamental question about the risk-free status of sovereign debt in Solvency II. The events of recent months have shown that some government bonds are anything but risk free. Yet Solvency II’s standard formula maintains the fiction that there is no risk of default. Insurers are free to hold government bonds without any additional capital charge to reflect the credit risk of a particular sovereign. Greek debt is treated the same as German government bonds.

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