Solvency II, or how to sweep the downside risk under the carpet
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Publication:1799652
DOI10.1016/J.INSMATHECO.2017.11.010zbMATH Open1416.91224arXiv1702.08901OpenAlexW2594096445WikidataQ129980140 ScholiaQ129980140MaRDI QIDQ1799652FDOQ1799652
Authors: Stefan Weber 
Publication date: 19 October 2018
Published in: Insurance Mathematics \& Economics (Search for Journal in Brave)
Abstract: Under Solvency II the computation of capital requirements is based on value at risk (V@R). V@R is a quantile-based risk measure and neglects extreme risks in the tail. V@R belongs to the family of distortion risk measures. A serious deficiency of V@R is that firms can hide their total downside risk in corporate networks, unless a consolidated solvency balance sheet is required for each economic scenario. In this case, they can largely reduce their total capital requirements via appropriate transfer agreements within a network structure consisting of sufficiently many entities and thereby circumvent capital regulation. We prove several versions of such a result for general distortion risk measures of V@R-type, explicitly construct suitable allocations of the network portfolio, and finally demonstrate how these findings can be extended beyond distortion risk measures. We also discuss why consolidation requirements cannot completely eliminate this problem. Capital regulation should thus be based on coherent or convex risk measures like average value at risk or expectiles.
Full work available at URL: https://arxiv.org/abs/1702.08901
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Cited In (19)
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- An elementary proof of the dual representation of expected shortfall
- The impact of insurance premium taxation
- Optimal initial capital induced by the optimized certainty equivalent
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