There are difference in Risk‐based financial supervision for Banking and Insurance. Business models are different, risks are different and thus regulatory measures are also different. But this does not mean that systems cannot learn from each other. This paper identifies the key differences between Banking and Insurance regulation which are, inter alia, that

• Solvency II is broader than Basel II/III
• Mismatch and funding risk is appreciated more in Solvency II than in Basel II/III
• The Solvency II capital definitions appear to be much more stringent than the corresponding Basel II/III definitions

In the U S, the National Association of Insurance Commissioners (NAIC) creates model laws for the regulation of life insurance. In the U.S., the statutory valuation of traditional life insurance reserves is strongly rules-based.

The maximum valuation interest rates are based on the monthly average of the composite yield on seasoned corporate bonds, as published by Moody’s Investors Service, Inc.. The valuation of assets for annual statement purposes is very detailed and complex. The valuation of assets should conform to the statutory accounting practices that have been prescribed or permitted by the state in which the insurance company is incorporated. The Primary goal of Risk bases capital for Life and Health Insurers Model Act is to define a minimum level of regulatory capital that reflected all asset and liability risks to which an insurer was exposed. Consequently, the US RBC rules are very detailed and complex.

Like the Canadian MCCSR formula, the U.S. RBC formula uses a bottom-up approach to risk measurement. The Authorized Control Level RBC (ACL RBC) for life insurance is defined by the following formula:

ACL RBC = C0 + C4a + under root of (C21c + C22 + C24b + (C10 + C3a) 2     

Where

• C0: Asset Risk-Affiliates

• C1cs: Unaffiliated common stock and affiliated noninsurance common stock components

• C10 : Asset Risk-Other (excluding common stock)

• C2: Insurance Risk

• C3a: Interest Rate Risk and Market Risk

• C4a: Business Risk

If there is fall in RBC ratio for five predefined levels, a certain regulatory “action level” will be triggered. For example, if the ratio falls below 70%, the state insurance commissioner must take control of the insurer.

Now lets us check Basel I, II and III for banks

Basel II/III was designed as principle‐based but in an environment where there was a low threat of enforcement. Solvency II is also principled based but has an attendant credible threat of enforcement.

2.2. Solvency II is broader than Basel II/III in that it is a total Balance Sheet approach incorporating assets and liabilities whereas Basel II/III concentrates on Credit, Market and Operational risk.

Initially Basel II was designed with the primary aim of achieving capital efficiency for banks. The changes in banking that led to the subprime crisis hinged, in large part, on three closely linked developments coupled with the regulation. These were:

(i) the huge growth in derivatives;

(ii) the decomposition and distribution of credit through securitisation;

(iii) the formidable combination of mathematics and computing power in risk management.

Model based regulation implies a strong requirement for reliable, comprehensive through‐the‐cycle historic data, which is a challenge for many banks.

We can find the following difference among Risk Based capital for Life insurers in the US and Basel I, II and III for banks.

• National Association of Insurance Commissioners (NAIC) creates model laws for the regulation of life insurance. Basel II/III was designed as principle‐based but in an environment where there was a low threat of enforcement. Solvency II is also principled based but has an attendant credible threat of enforcement.
• For the bank more intense and effective supervision , including through stronger supervisor mandates resources and powerAs against for the insurance Company in US intense and effective supervision with direct regulatory power with holding company and oversight of The System Risk And Management Plan (SRMP)
• For the banks there are Higher capital surchages ranging form 1 to 3.5% of risk Weighted AssetsAnd for insurance company Capital surcharged to be devloped with the basic Capital Requirement
• Bank are institutionally connected as inter bank market and insurer aare stand alone operator
• Bank faces inherent liquidity risk as against insurer are liquidity rich
• Bank create money and they constitute the payment System. Insurer do not create money and they use the payment System.

2.RBC to Solvency II

The Solvency II Standard Formula (Standard Formula) is part of a regulatory framework referred to as Solvency II. One part of the Solvency II framework requires that each insurer1 calculates its Solvency Capital Requirement (SCR) using a Standard Formula, an internal model, or some combination of the two.

The SCR, whether calculated from the Standard Formula or otherwise, is the capital level “correspond[ing] to the Value-at-Risk (VaR) of the basic own funds of an insurance or        reinsurance undertaking subject to a confidence level of 99.5% over a one-year period.”

RBC also has several levels ranging from Company Action Level (CAL) to Mandatory Control Level (MCL).

There is no target probability safety level specified for the RBC action levels.

U.S. Statutory Accounting reserves are not discounted (other than for tabular indemnity benefits such as workers compensation life table claims and structured settlements) and contain no explicit safety margin beyond the effect of not discounting. Investment grade bonds can be valued at amortized cost rather than market value6 and the value of reinsurance recoverable are reduced for the risk of non-payment, but often only if non-payment is likely.