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3 questions about economic capital and regulatory capital

U

uktous

Member
question1

standard model for solvency 2 and internal model

Which of them can be used to determine economic capital or / and regulatory capital?

question2, 3

some measures of risk: VaR, expected shortfall ...
some ways to evaluate the risk: senario test, stress test ...

How they can help us to determine capital required?

What is the difference between risk measure and risk evaluate?
 
question1

standard model for solvency 2 and internal model

Which of them can be used to determine economic capital or / and regulatory capital?
Click to expand...

Under Solvency II, insurers need to have assets which target the Solvency Capital Requirement (SCR). The SCR is regulatory capital. The Core Reading in Chapter 47 pg 9 states that the SCR can be calculated using either an internal model or the standard model.

Economic capital is the amount of capital that the directors of a bank or insurer think they need to run their business. This is an internal rather than a regulatory calculation, so the directors are free to choose whichever model they want ie an internal model.

question2, 3

some measures of risk: VaR, expected shortfall ...
some ways to evaluate the risk: senario test, stress test ...

How they can help us to determine capital required?

What is the difference between risk measure and risk evaluate?
Click to expand...

Risk measures assume a particular probability distribution to calculate numbers of interest, eg probability of loss, size of loss given a particular confidence level.

Scenario/stress tests ask 'what will happen in the following event?'.

In both cases we get a feel for what could go wrong and hence the amount of capital we need to protect us from insolvency.

Best wishes

Mark
 
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