Why the submodule CAT does not exist in the Market Risk module in Solvency 2 ?

Discussion in 'SA2' started by Duc Thinh Vu, Nov 1, 2022.

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  1. Duc Thinh Vu

    Duc Thinh Vu Active Member

    Hi everyone, I just want to ask a question that does not relate to the exam.

    Could you please explain to me why the sub-module CAT doesn't exist in Market Risk module in Solvency 2, while it does exists in other module (Health, Life, Non-life), provided that the ocurrence of a catastrophic event (for example 11 September 2001) does have impact in the Own funds of an insurance company in terms of Market Risk module. (for example the value of stocks held by insurance companies decreased in value).

    Thank you very much for your help!
     
    Duc Thinh Vu, Nov 1, 2022
    #1
  2. Lindsay Smitherman

    Lindsay Smitherman ActEd Tutor Staff Member

    Hi

    Under the insurance risk modules, the CAT sub-module relates to a one-off shock event, such as (for life) a high number of additional deaths. There is also a separate mortality stress, which tests a permanent increase in mortality rates. So having the CAT sub-module allows testing of two distinct adverse events: higher deaths from a one-off adverse event, and a permanent increase in mortality rates projecting forwards through the liability term.

    For the market risk module, there is no need to have a separate CAT sub-module because the equity stress already is a shock one-off event (significant fall in market values).

    Hope that helps.
     
    Lindsay Smitherman, Nov 10, 2022
    #2
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