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Over recent decades, insurance and financial industries have been affected by the volatility of economic cycles. A severe financial crisis struck the market in the year 2000 and subsequently between 2007 and 2012. During these economic downturns, financial businesses (including insurance companies) experienced technical bankruptcy due to insufficient capital holdings. Therefore, the private sector and, in some cases, national governments were called upon to provide a means of recovery, in terms of capital, since their bankruptcy would cause a serious threat to the economy and community as a whole. In response to this adverse environment, governments and regulators have since drawn up stringent rules and regulations, within the insurance industry, to provide a more prudent risk assessment and, in turn, minimise the possibility of future bankruptcy. These regulations are usually known as `directives' and have been implemented across the EU, USA, Australia and China, among others. One of the most efficiently employed capital recovery methods, used in practice, is the provision of capital injections. This injection of capital is usually sourced from a companies shareholders (as long as it is profitable for them to do so) or, in some extreme cases, by the national government. Throughout the majority of this thesis, we employ the classical continuous-time risk model to analyse the financial impact of capital injections under the regulatory constraints of Solvency II and, further, by capturing the realistic procedure of financial and administrative processing linked to raising such funds, consider the risk exposure during the delay between requesting and receiving a capital injection. In the final chapter, we move to a discrete-time setting and discuss alternative capital recovery methods for a different line of business. In this case, where we consider pharmaceutical and petroleum businesses, the classic insurance risk model of the previous chapters is unsuitable and the so-called dual risk model is analysed. Moreover, it is believed that the fall into deficit (bankruptcy) can be recovered within a given time period from normal trading strategies. That is, capital injections are not required and the company can recover from deficit without financial assistance. |
