Solvency II Is Not Risk-Based-Could It Be? Evidence from Non-Life Calibrations

Risk-based prudential regulations are spreading. For example, the capital requirements of Solvency II are considered to be founded on a riskmeasure. We focus on premium and reserving risks, which represent 40% of capital requirements for non-life insurance companies in Europe, and draw on internal robustness tests to demonstrate that thesemeasures are unreliable. There are three possible explanations for this lack of reliability: a political economy factor, an idiosyncratic factor, and an epistemological barrier. We examine each of these and evaluate their significance, thus casting doubts on the feasibility of such ambition and providing insights to adapt the design of any prudential regulation intended to be risk-based to such pitfalls.