Capital evaluation under Solvency 2
Global trends in regulatory capital requirement are towards a risk-based approach, namely, that since capital follows risk, the statutory capital requirements should be consistent with the level of risk exposed within a portfolio. In the European context, as far as insurance is concerned, this is referred to as Solvency 2.
In 2004 the Financial Services Authority (FSA) in the UK imposed their own interpretation of Solvency 2, ahead of other EU regulators, and a major part of the new rules is the requirement for insurance firms to carry out their own assessment of their capital needs, the so-called Internal Capital Assessment (ICA), which is compared against a formulaic approach developed by the FSA and their advisors (link to relevant spot in Watson website).
The application of capital standards is constantly developing as the FSA is exposed to the diversity of interpretations of ICAs. Broadly speaking, the FSA has specified that capital resources should be assessed to be consistent with a 1-in-200 year value at risk (VAR), expressed over a one-year timeframe, or possibly a lower confidence interval over a longer timeframe if appropriate.
James, Brennan & Associates has extensive experience of calibrating and constructing ICA models using a variety of tools. In particular RiskExplorer ™ (link to risk explorer) is an excellent platform to quickly and efficiently create highly sophisticated capital models. We also have expertise in developing capital and Dynamic Financial Analysis models using spreadsheet-based models.
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