Scenario-based capital requirements for the interest rate risk of insurance companies

Arbeitspapier

The Solvency II standard formula measures interest rate risk based on two stress scenarios which are supposed to reflect the 1-in-200 year event over a 12-month time horizon. The calibration of these scenarios appears much too optimistic when comparing them against historical yield curve movements. This article demonstrates that interest rate risk is measured more accurately when using a (vector) autoregressive process together with a GARCH process for the residuals. In line with the concept of a pragmatic standard formula, the calculation of the Value-at-Risk can be boiled down to 4 scenarios, which are elicited with a Principal Component Analysis (PCA), at the cost of a relatively small measurement error.

Object Details

• Language: Englisch

References and Relationships

• Bibliographic citation: Series: ICIR Working Paper Series ; No. 28/17

Classification and Topics

• Classification: Wirtschaft ; Financial Forecasting and Simulation ; Insurance; Insurance Companies; Actuarial Studies ; Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill ; Corporate Finance and Governance: Government Policy and Regulation
• Subject: Interest Rate Risk ; Principal Component Analysis ; Capital Requirements ; Solvency II

Contributors, Places and Time

• Event: Geistige Schöpfung
• (who): Schlütter, Sebastian
• Event: Veröffentlichung
• (who): Goethe University Frankfurt, International Center for Insurance Regulation (ICIR)
• (where): Frankfurt a. M.
• (when): 2017

Further information

• Handle: http://hdl.handle.net/10419/161670
• Last update: 10.03.2025, 11:44 AM CET