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Capital requirements (Uses of internal models (To calculate economic…
Capital requirements
Uses of internal models
To calculate economic capital using different risk measures, such as VaR and Tail VaR.
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Cost of capital
Reflects the likelihood of investment restrictions on capital that is earmarked to support in-force business
The premium (or charges) for a financial contract should include an allowance for the loss of return on capital tied up in the contract, i.e. the 'cost of capital'. This will lead to higher premiums (or charges).
Aim of the product provider is that shareholders should earn the same return on available capital, whether used to support business issued or invested freely.
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The MCR and the SCR
MCR (Minimum Capital Requirement) is the threshold at which companies will no longer be permitted to trade,
SCR (Solvency Capital Requirement) is the target level of capital below which companies may need to discuss remedies with their regulators.
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Components of profit
trading profit
premiums plus investment income on provisions (and on net cashflows received), less claims, expenses, tax and the net increase in provisions
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