Risk models for capital adequacy: Applications in the context of solvency II and beyond

Abstract

In the context of the quantitative requirements under pillar 1 of Solvency II, internal risk models quantify a specific company's risk position, that is, measure the risk capital it requires. Because the individual insurance company's situation is modelled, its risk landscape is reflected more accurately than if a standard model approach were used. A brief case study indicates that internal risk models should be used not only to fulfill regulatory requirements, they have to and they do feature more benefits: risk models foster risk management processes; therefore, they are capable of supporting risk-based business decisions. Finally, they constitute a kernel for any risk-based performance measurement framework. © 2006 The International Association for the Study of Insurance Economics.