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Capital allocation and risk appetite under Solvency II framework

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  • Ivan Granito
  • Paolo De Angelis

Abstract

The aim of this paper is to introduce a method for computing the allocated Solvency II Capital Requirement (SCR) of each Risk which the company is exposed to, taking in account for the diversification effect among different risks. The method suggested is based on the Euler principle. We show that it has very suitable properties like coherence in the sense of Denault (2001) and RORAC compatibility, and practical implications for the companies that use the standard formula. Further, we show how this approach can be used to evaluate the underwriting and reinsurance policies and to define a measure of the Company's risk appetite, based on the capital at risk return.

Suggested Citation

  • Ivan Granito & Paolo De Angelis, 2015. "Capital allocation and risk appetite under Solvency II framework," Papers 1511.02934, arXiv.org.
    • Handle: RePEc:arx:papers:1511.02934
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    References listed on IDEAS

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    1. Véronique Maume-Deschamps & Didier Rullière & Khalil Said, 2015. "A risk management approach to capital allocation," Working Papers hal-01163180, HAL.
    2. Acerbi, Carlo & Tasche, Dirk, 2002. "On the coherence of expected shortfall," Journal of Banking & Finance, Elsevier, vol. 26(7), pages 1487-1503, July.
    3. Helmut Gründl & Hato Schmeiser, 2007. "Capital Allocation for Insurance Companies—What Good IS IT?," Journal of Risk & Insurance, The American Risk and Insurance Association, vol. 74(2), pages 301-317, June.
    4. Dirk Tasche, 2002. "Expected Shortfall and Beyond," Papers cond-mat/0203558, arXiv.org, revised Oct 2002.
    5. Jan Dhaene & Mark Goovaerts & Rob Kaas, 2003. "Economic Capital Allocation Derived from Risk Measures," North American Actuarial Journal, Taylor & Francis Journals, vol. 7(2), pages 44-56.
    6. Tasche, Dirk, 2002. "Expected shortfall and beyond," Journal of Banking & Finance, Elsevier, vol. 26(7), pages 1519-1533, July.
    7. Jan Dhaene & Andreas Tsanakas & Emiliano A. Valdez & Steven Vanduffel, 2012. "Optimal Capital Allocation Principles," Journal of Risk & Insurance, The American Risk and Insurance Association, vol. 79(1), pages 1-28, March.
    8. Philippe Artzner & Freddy Delbaen & Jean‐Marc Eber & David Heath, 1999. "Coherent Measures of Risk," Mathematical Finance, Wiley Blackwell, vol. 9(3), pages 203-228, July.
    9. Buch, A. & Dorfleitner, G., 2008. "Coherent risk measures, coherent capital allocations and the gradient allocation principle," Insurance: Mathematics and Economics, Elsevier, vol. 42(1), pages 235-242, February.
    10. Dirk Tasche, 2007. "Capital Allocation to Business Units and Sub-Portfolios: the Euler Principle," Papers 0708.2542, arXiv.org, revised Jun 2008.
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    Cited by:

    1. Dóra Balog, 2017. "Capital Allocation in the Insurance Sector," Financial and Economic Review, Magyar Nemzeti Bank (Central Bank of Hungary), vol. 16(3), pages 74-97.
    2. Joachim Paulusch, 2017. "The Solvency II Standard Formula, Linear Geometry, and Diversification," JRFM, MDPI, vol. 10(2), pages 1-12, May.

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