The Effects of Contingent Convertible (CoCo) Bonds on Insurers' Capital Requirements Under Solvency II

  • The Liikanen Group proposes contingent convertible (CoCo) bonds as a potential mechanism to enhance financial stability in the banking industry. Especially life insurance companies could serve as CoCo bond holders as they are already the largest purchasers of bank bonds in Europe. We develop a stylized model with a direct financial connection between banking and insurance and study the effects of various types of bonds such as non-convertible bonds, write-down bonds and CoCos on banks' and insurers' risk situations. In addition, we compare insurers' capital requirements under the proposed Solvency II standard model as well as under an internal model that ex-ante anticipates additional risks due to possible conversion of the CoCo bond into bank shares. In order to check the robustness of our findings, we consider different CoCo designs (write-down factor, trigger value, holding time of bank shares) and compare the resulting capital requirements with those for holding non-convertible bonds. We identify situations in which insurers benefit from buying CoCo bonds due to lower capital requirements and higher coupon rates. Furthermore, our results highlight how the Solvency II standard model can mislead insurers in their CoCo investment decision due to economically irrational incentives.

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Metadaten
Author:Tobias Niedrig, Helmut GründlGND
URN:urn:nbn:de:hebis:30:3-374437
URL:http://ssrn.com/abstract=2593035
DOI:https://doi.org/10.2139/ssrn.2593035
Parent Title (English):SAFE working paper series ; No. 98
Series (Serial Number):SAFE working paper (98)
Publisher:SAFE
Place of publication:Frankfurt am Main
Document Type:Working Paper
Language:English
Date of Publication (online):2015/04/12
Date of first Publication:2015/04/12
Publishing Institution:Universitätsbibliothek Johann Christian Senckenberg
Release Date:2015/05/19
Tag:Basel III; CoCo Bond; Contingent Convertible Capital; Interconnectedness; Life Insurance; Solvency II
Issue:This version: February 2015
Page Number:37
HeBIS-PPN:359588018
Institutes:Wirtschaftswissenschaften / Wirtschaftswissenschaften
Wissenschaftliche Zentren und koordinierte Programme / House of Finance (HoF)
Wissenschaftliche Zentren und koordinierte Programme / Center for Financial Studies (CFS)
Wissenschaftliche Zentren und koordinierte Programme / Sustainable Architecture for Finance in Europe (SAFE)
Dewey Decimal Classification:3 Sozialwissenschaften / 33 Wirtschaft / 330 Wirtschaft
Sammlungen:Universitätspublikationen
Licence (German):License LogoDeutsches Urheberrecht