Capital management (2)
regulatory capital
solvency capital requirement
capital required by the regulator to protect against the risk of statutory insolvency
total of:
excess of the provisions established on a regulatory basis over the best estimate valuation of the provisions
an additional capital requirement in excess of the provisions established
provisions vs additional capital requirement
in some territories, or for some types of financial provider: the regulatory basis used for the provisions is best estimate
the additional capital requirement is substantial
in other cases the regulatory basis used for the provisions is highly prescriptive and prudent
the additional capital requirement is small
Solvency II
solvency requirement for insurance companies' risks. Operative from 1 Jan 16 in all EU states.
three pillars
quantification of risk exposures and capital requirements
a supervisory regime
disclosure requirements
Minimum Capital Requirement (MCR) is the threshold at which companies will no longer be permitted to trade.
Solvency Capital Requirement (SCR) is the target level of capital below which companies may need to discuss remedies with their regulators.
pros and cons of standard v internal models
standard
internal
SCR calculation less complex and time consuming
aims to capture risk profile of an average company, and so it is not necessarily appropriate to the actual companies that need to use it
benchmarked against standard
likely to be used only by large companies who can justify cost of using internal model
uses of internal models
calculate economic capital using different tail measures, such as VaR and Tail VaR
calculate levels of confidence in the level of economic capital calculated
to apply different time horizons to the assessment of solvency and risk
to include other risk classes not covered in the standard model
economic capital
amount of capital the provide determines is appropriate to hold given its assets, liabilities and business objectives
based on:
risk profile of individual assets and liabilities in portfolio
correlation of the risks
desired level of overall credit deterioration that the provider wishes to be able to withstand