Quantifying credit and market risk under Solvency II: Standard approach versus internal model
AbstractEven though insurers predominantly invest in bonds, credit risk associated with government and corporate bonds has long not been a focus in their risk management. After the crisis of several European countries, however, credit risk has recently been paid greater attention. Nevertheless, the latest version of the Solvency II standard model (QIS 5), provided by regulators for deriving solvency capital requirements, still does not require capital for credit risk inherent in, e.g., EEA issued government bonds from Greece or Spain. This paper aims to provide an alternative approach and compares the standard model with a partial internal risk model using a rating-based credit risk model that accounts for credit, equity, and interest rate risk inherent in a portfolio of stocks and bonds. The findings demonstrate that solvency capital requirements strongly depend on the quality and composition of an insurer’s asset portfolio and that model risk in regard to model choice and calibration plays an important role in the quantification.
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Bibliographic InfoArticle provided by Elsevier in its journal Insurance: Mathematics and Economics.
Volume (Year): 51 (2012)
Issue (Month): 3 ()
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Web page: http://www.elsevier.com/locate/inca/505554
Solvency II; Internal model; Rating-based credit risk model; Market risk; Credit risk;
Find related papers by JEL classification:
- G22 - Financial Economics - - Financial Institutions and Services - - - Insurance; Insurance Companies; Actuarial Studies
- G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
- G38 - Financial Economics - - Corporate Finance and Governance - - - Government Policy and Regulation
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