37 Capital Requirements

Question 1

Assessing Economical Capital position [10]

Answer 1

ECO CAP REQUIREMENTS:
* DEF: cap providers determine
    adequate given his:
     - A, L, business objectives 
* determine based on:
     - individual risks on A, L in
        Portfolio 
     - correlation between risks
     - desired level of credit 
        deterioration wishes to
        withstand 
* for each major risk MCLOEB a:
     - stochastic or 
     - deterministic model with 
       scenario or stress testing to
       determine cap requirement
* make stochastic model of 
   future sensors with downside 
* such stochastic automatically
    allows for correlat advantage 
* project all risk scenarios 
    Balance Sheet forward 
* calculate risk measures like
   V@R, TV@R for Eco Cap having
     - 99.5% solvency in next 10year

ECO CAP AVAILABLE:
* make Eco Balance Sheet with:
     - Market value of A, L
          \+ A look up if possible
             (tradable assets) or
             alternative method
          \+ L discounted cashflow or
             unlikely look up value
* difference is available eco cap

A = L + available eco cap
available eco cap =
required eco cap + free cap

Question 2

Bases and models for assessing Capital requirement [2]

Answer 2

BASES

• Regulatory Capital
  
  • Solvency 2
  • Basel 3
• Economic Capital

MODELS

• Standard formula
• Internal model

Question 3

Solvency 2 as a Bases of capital requirement [20]

Answer 3

* state min solvency cap for EU
   insurance companies 
* follow on Solvency 1 but wider
   than just cap amount, also:
     - how value A
     - how value provisions 
     - Risk management system 
* on companies with:
     - gross premium > €5mil or
     - reserves > €25mil
* It Is Based on 3 Pillars:
1) Quantification of risk & cap req
     - valuing A, L & cap require
          \+ MCR: threshold no longer 
              be premited to trade
          \+ SCR: below need discuss
              remedies with regulator
     - valued on best estimate 
     - regulator can have a say like
        'derivatives not count'
2) Supervisory Regime
     (Qualitive aspect, supervision)
     - internal controls 
     - risk management process 
     - company own view on 
        strategic cap need
     - Monitoring visits by regulator
       and comply to ORSA:
          \+ ORSA base case of cap
          ^ make what if scenarios 
          ^ form 3 year plan
          ^ budget on base case 
          ^ project IS & BS on
              scenario forward 
3) Disclosure requirements to:
     - private stakeholders 
     - and Public 
* SCR can be calculated on:
     - prescribed formula.
          \+ each risk 1/200 prob of 
             ruin in next year. Then 
             Matrix to lower diversif
          \+ Less complex & less 
             time consume
          \+ on ave comp so not best
     - internal model.
          \+ need run both 3 years
          \+ need regulator approval

Question 4

Basel 3 as a Bases of capital requirement [5]

Answer 4

• global banking capital
  
  • implement by 2027
• three pillars
  
  • min cap requirement:
    + rules for evaluating cap
    for MCO risks
  • risk manage & supervision
    + governance & risk
    managing and other risks
  • market discipline & disclose
    + public and regulatory

Question 5

Models of assessing Capital requirement [7]

Answer 5

STANDARD FORMULA
* factor based + stress test +
scenario combination on
- underwriting & MCO risks

INTERNAL MODEL 
* need regulator approved to 
     use for SCR els mostly eco cap
* stochastic model to reflect 
   own company 
* can be used for:
     - calculate eco cap using diff 
        risk measures like V@R, T
     - confidence level in eco cap
     - apply diff time horizon to
        solvency and risk
     - include other risk not covere 
        in standard formula 
* but internal need:
     - more time, complex
     - regulator aprovement
     - run both systems for 3 years