SOLVENCY II. I have posted earlier on the fact that many regulators thought until fairly recently that financial companies should be more aggressive at reducing their reserves. I posted recently about Basel II, the new regulatory regime being introduced for bank reserves. The AIG interview I linked to yesterday called my attention to the fact that there was a similar effort for insurance companies, Solvency II, “the updated set of regulatory requirements for insurance firms that operate in the European Union.” In the March 2007 interview I linked to yesterday, AIG’s Chief Financial Officer said that AIG was pursuing a similar process to Solvency II and that he expected Solvency II principles to “make their way into the United States and change fairly rapidly the current risk-based capital requirements towards a more dynamic model.” The financial crisis has developed in part because institutions were following cutting-edge theories—and also in part because regulators were following those cutting-edge theories.

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