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Ruin probability

I

indexo

Member
Hi,


I am actually a bit confused how capital requirements are related to ruin probabilities.
Often we hear that capital requirement is calculated based on ruin probabilities.

Do I interpret this as: if ruin probability is 5%, there must be sufficient capital to cover the 5% ruin?
Or do I interpret as: there is 5% that the company will go insolvent?

Thanks,
 
indexo said:
Hi,


I am actually a bit confused how capital requirements are related to ruin probabilities.
Often we hear that capital requirement is calculated based on ruin probabilities.

Do I interpret this as: if ruin probability is 5%, there must be sufficient capital to cover the 5% ruin?
Or do I interpret as: there is 5% that the company will go insolvent?

Thanks,
Click to expand...
It's the second interpretation. The insurer will hold enough capital to be solvent 95% of the time. So there remains a 5% chance of insolvency.

Best wishes

Mark
 
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