Hello, This is just a general question (I cannot remember exactly where I saw this from the course note). For reserve sensitivity under Solvency II, the relationship between reserve amount and discount rate will not be entirely linear with existence of guarantee (and option). Why is this the case?
Hi Are you referring to the concept of non-linearity? Many risks are non-linear. For example, if an equity market fall of 20% results in a capital requirement of £20m, it is possible that a 40% fall in the equity markets results in a capital requirement greater than £40m. This is due to the existence of guarantees and the probability with a larger fall they might bite. Does this help? Thanks Em
