Chapter 22 - Capital Modelling Methodologies Flashcards
Value at risk (VaR)
A widely used measure of risk of loss on a specific portfolio of financial assets. A threshold value such that the probability that the mark-to-market losses on the portfolio over the given time horizon exceeds this value is the given probability level (given a certain portfolio, probability and time horizon)
Regulatory capital
The amount of capital an insurer is required to hold for regulatory purposed. Held to ensure that policyholder interests are protected. Usually on a prescribed basis (best estimate or prudent)
Economic capital
The amount of capital that a provider determines is appropriate to hold given its assets, its liabilities, and its business objectives
Available capital
The difference between the market value of assets (MVA) and the market value of liabilities (MVL) of a provider
Free capital
The amount remaining when deducting the economic capital requirement from a provider’s available capital (i.e. MVA - MVL - Economic capital)
Risk profile
The risks that arise from business that has already been written and a finite period of new business activity. The profile is defined in terms of a financial outcome that can be measured as a success of failure
Risk measure
The link between the financial outcome defined in the risk profile and the capital required to achieve that outcome
Risk tolerance
The required confidence level stated in the risk measure
Insurance risk
The risk of loss arising from the inherent uncertainties about the occurrence, timing and amount of insurance liabilities, expenses and premiums. Split into underwriting risk (relating to risks yet to be written/earned) and reserving risk (relating to risks already earned)
Market risk
The risk that due to adverse movements in markets, that a firm is exposed to fluctuations in the value of its assets or in the level of income from its assets. The risk exists to the extent that any movement in assets is not matched by the corresponding movements in the liabilities
Credit risk
The risk of financial loss due to another party failing to meet its financial obligations, or failing to do so in a timely fashion
Operational risk
The risk of loss resulting from inadequate or failed internal processes, people and systems or from external events
Group risk
The risk a firm experiences from being part of a group
Liquidity risk
The risk that a firm is unable to meet its obligations as they fall due as a consequence of having a timing mismatch or a mismatch between assets and liabilities
Spread risk
The risk that credit spreads may not remain constant in the future
