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A Solution for Solvency II Quantitative Requirements Modeling with Long-Tail Liabilities

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  • David Munroe
  • David Odell
  • Serge Sandler
  • Ben Zehnwirth

Abstract

The European Parliament’s Solvency II Directive introduced a new regulation for insurance and reinsurance business designed to establish a consistently improved level of policyholder protection by means of a three-pillar process. Pillar 1 of the directive contains quantitative requirements for the insurance industry in respect to technical provisions (TPs) and the solvency capital requirement (SCR). The cornerstone of Solvency II one-year risk horizon is the Fair Value of Liabilities (FVL). The SCR and Economic Balance Sheet at inception should be able to withstand a first future calendar year in distress (at the level of 1-in-200-year event). We provide a rigorous statistical treatment of the risk metrics required to fulfil Solvency II requirements for internal models applicable to reserve risk with long-tail liabilities. The proposed internal model is novel in not relying on the proportionality proxy. A tractable simulation based solution ensures adequate capital to restore the economic balance sheet to its FVL should the first future calendar year be in distress.

Suggested Citation

  • David Munroe & David Odell & Serge Sandler & Ben Zehnwirth, 2015. "A Solution for Solvency II Quantitative Requirements Modeling with Long-Tail Liabilities," North American Actuarial Journal, Taylor & Francis Journals, vol. 19(2), pages 79-93, April.
    • Handle: RePEc:taf:uaajxx:v:19:y:2015:i:2:p:79-93
    DOI: 10.1080/10920277.2014.997934
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