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Quantifying Credit and Market Risk Under Solvency II: Standard Approach Versus Internal Model
Company: Friedrich-Alexander Universität Erlangen-Nürnberg
Company Url: Click here to open
Year Of Publication: 2012
Month Of Publication: July
Pages: 47
Download Count: 4
View Count: 1290
Comment Num: 0
Language: English
Source: working paper
Who Can Read: Free
Date: 11-4-2012
Publisher: Administrator
Even 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 fully 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.
This document is published in Insurance: Mathematics and Economics (volume 51, number 3), November 2012
Gatzert, Nadine Sign in to follow this author
Martin, Michael Sign in to follow this author
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