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,
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
