Insurance 2 Flashcards
Economic capital as a measure of risk
How much capital does a FI need to set aside in order to absorb a certain risk when it arises
Purpose :
- Common risk measure for all risks
- Enables aggregation of risk across risk types
- How much capital a business unit,product type,portfolio needs given the risk profile
- used as a common denominator in risk adjusted performance measures (eg risk adjusted return on capital )
How to calculate ecap
You need :
-Distribution of losses per risk type; financial market risk (equity,credit, interest etc) Non financial (use other approaches )
- aggregation methodology to add ECAP per risk type together ; most common approach used in assumption of normality
How to measure economic capital
Mismatch position between asset and liabilities
Longevity risk
Equity position
Claim risk (non life )
Operational risk
- loss data base
- Scenario analysis with experts
What is solvency 2
Regulatory framework for reinsurers based on the eu
Pillar 1- financial requirements :
Quantitive requirements, min cap requirement, market to market balance sheet approach, solvency capital requirement
Pillar 2 - governance and supervision :
Supervisory review (DNB),system of governance (3LoD), key function holders, own risk self assessment
Pillar 3 - reporting and disclosure
Reporting and disclosure (SCFR,RSR), solvency and financial, condition report (public) , regulatory reporting (private), accountability
Why solvency 2
Enhanced protection of policy holders :
- required capital should be a reflection of risk
- solvency 1 required capital insufficient
More insight into current financial
position of insurance companies :
-balance sheet based on market value
-no implicit prudence in TPs but explicit margin risk
Better link with own risk management practice
- room for internal models and own data
- internal assessment of ram and solvency capital
Improving level playing field :
-cross border and sectoral
