Chapter 47: Capital Management (2) Flashcards
Regulatory solvency capital requirement
The total of:
- the margins between the best estimate basis and the regulatory liability valuation basis
- an amount of additional capital in excess of the regulatory provisions.
The Basel Accord
Set requirements for the amount of capital that banks need to hold to reflect the level of risk in the business that they write and manage.
3 Pillars of Solvency II
- quantification of risk exposures and capital requirements
- supervisory regime
- disclosure requirements
2 levels of capital requirements for Solvency II
- Minimum Capital Requirement
- Solvency Capital Requirement
Minimum Capital Requirement (MCR)
Threshold at which companies will no longer be permitted to trade
Solvency Capital Requirement (SCR)
The target level of capital below which companies may need to discuss remedies with their regulators.
Economic capital
The amount of capital that a provider determines is appropriate to hold given
- its assets,
- liabilities,
- business objectives.
Economic Capital will be determined based upon:
- risk profile of the individual assets and liabilities in its portfolio
- correlation of the risks
- desired level of overall credit deterioration that the provider wishes to be able to withstand
The economic balance sheet shows:
- market values of a provider’s assets (MVA)
- market values of a provider’s liabilities (MVL)
- provider’s available capital, defined as MVA - MVL
Internal models
Used to calculate economic capital requirements and may be used to determine the Solvency II SCR.
Aim to create a stochastic model that reflects a company’s own business structure.
4 Uses for internal models
- to calculate economic capital using different risk measures, eg VaR and Tail VaR
- to calculate levels of confidence in the level of economic capital calculated
- to apply different time horizons to the assessment of solvency and risk
- to include other risks not covered in the standard model.
A provider of financial benefits need to hold provisions for… (4)
- liabilites that have been accrued but which have not yet been paid
- future periods of insurance against which premiums have already been received
- claims already incurred but which have yet to be settled.
How is the capital requirement determined (Solvency II)
Combination of
- stress tests,
- scenarios
- factor-based capital charges
4 Risks that standard model allows for (Solvency II)
- underwriting risk
- market risk
- credit / default risk
- operational risk
Examples of Underwriting risk
premium, reserve, catastrophe, expenses and lapse risks.