Multi-stakeholder approach to capital adequacy

Question 1

Stakeholders

Answer 1

1. debtholders: more capital
2. regulators: more capital (ensure claims are paid) and affordable premiums
3. shareholders: want it ALL (the right amount of capital to max the RoC and to absorb non-diversifiable risk)
4. policyholders: want claims paid (not as concerned about efficient use of capital)
5. rating agencies: want claims paid
6. management: follow their incentives

Question 2

Problems with EC model

Answer 2

Lacks transparency
Produces one measure of capital adequacy (and capital adequacy has different meanings to different stakeholders)
Arbitrary risk thresholds and significant parameterization risk in the tail
Inflexible time horizon, risk metric, risk tolerances (risks and correlations change over time)
No real external consequences
Not well defined

Question 3

Benefits of a multi-stakeholder, multi-objective approach

Answer 3

Incorporates unique objectives of all stakeholders
Consistent evaluation
Goes beyond solvency analysis
Risk thresholds calibrated to observable info
Aligns with real world decision making
Multiple risk thresholds, multi-year time horizon
Produces multiple estimates of capital adequacy
Appropriately reflects risk diversification and aggregation over time

Question 4

Alternative name for multi-stakeholder approach to capital adequacy (Conning Research)

Answer 4

Financial Rating Risk Replication technique