Solvency II Capital & Stock Returns With Correlated Risks : Evidence From General Insurance

This paper examines dependency among stock returns, the line of business in the non-life insurance industry and solvency II margin capital requirements. It is too early to find general insurers being listed in NSE. Investors' reaction to the dependence between lines of non-life business is crucial for capital allocation. We estimate the correlation among major segments of losses of top listed non-life insurance firms in India during the period 2017 to 2020. We show that dependency among lines are crucial in determining the insurer’s risk capital. Although solvency (%) is negatively correlated with all the two measures of stock return, it is discouraging to note that they are feebly correlated. Further, closing returns are strongly correlated with segment level premium earnings. However the profit transfers are uncorrelated with stock returns. Nevertheless, the intersegment cross correlations are not insignificant in the sample. The implications of these findings are important in respect of working towards an insurance index for NSE or adding similar stocks to a portfolio