Market Discipline in the European Insurance Industry

• Applicant: Dr. Moritz Hanika
• Subject Area: Accounting and Finance
• Term: since 2026
• Project identifier: Deutsche Forschungsgemeinschaft (DFG) - Project number 583700507

European insurance supervision places particular emphasis on transparency as a tool for financial stability, especially in an international comparison. Since the introduction of Solvency II in 2016, insurers are mandated to publish an annual Solvency and Financial Condition Report. The aim of this regulation is to increase transparency toward investors and policyholders, thereby promoting market discipline. Market discipline describes the mechanism by which market participants react to disclosed risk information, encouraging insurers to adopt less risky management practices. Previous research indicates that investors and customers respond to published solvency ratios by adjusting their investment and purchasing decisions. However, these studies have mostly been limited to individual countries, insurance lines, or short time periods. It also remains unclear whether these observed market reactions have a truly disciplining effect on insurers’ risk-taking behaviour and thus justify the additional reporting costs. A comprehensive empirical analysis of market discipline under Solvency II is still missing. This research project fills this gap. Using an EU-wide panel dataset (2016–2024), it examines how market participants and insurers respond to changes in solvency ratios. The study analyses whether a decline in solvency ratios leads to lower premium growth or negative stock market reactions. Furthermore, it investigates whether insurers react to declining solvency ratios by raising capital, buying reinsurance, or reducing investment risk. Special attention is given to the extent to which insurers’ actions are amplified by the behaviour of investors and policyholders. The results provide empirical evidence on the effectiveness of transparency as a stability-enhancing instrument and contribute to a better understanding of market discipline. On this basis, policymakers and supervisors can further develop the existing requirements for public risk disclosure to strengthen both the financial stability and the international competitiveness of the European insurance sector in a sustainable way.

• DFG Programme: Research Grants