Robust models for supervision of pension funds and insurance companies
The European Commission has put forward the aspiration to further harmonise supervision on a European level. For insurance supervision, this has resulted in the Solvency II project which started in 2006 and is scheduled to be implemented in 2014. In the fall of 2011, the Commission has issued a call for advice asking the European Insurance and Occupational Pensions Authority (EIOPA) on how to achieve this goal for pension funds. Such a harmonization will prove to be a challenge and it may even impact the way pension schemes are designed. In a parallel development, the new pension agreement in the Netherlands calls for an adaption of the supervisory framework into a new framework provisionally called FTK2.
Models for calculating solvency and risks are important ingredients in the new supervisory frameworks. However, the recent financial crises have clearly demonstrated that models can be wrong. Recognizing their limitations is therefore important in designing supervision frameworks. While model uncertainty and robustness have been widely applied in engineering and operations research, its introduction in economics is much more recent. Making a supervision framework robust, calls for applying worst case scenarios and accounting for multiple decision makers who may have conflicting views.