Directive 2009/138 / EC Solvency II requires insurance and reinsurance undertakings to evaluate the Solvency Capital Requirement or through the so-called “standard formula” or through partial or full internal models. Focusing on the standard formula, the formula proposed by the regulator allows for a reduction in the capital due to the diversification effect, according to the typical subadditivity property of risk measures.
However, once the total capital has been assessed, there is no specific method for attributing the contribution of each source of risk to the overall solvency.
With this work the authors provide a closed formula with the aim to determine the allocation of capital, by demonstrating that the allocation formula adopted is consistent with Euler’s allocation principle. Furthermore, the solution being identified as the result of an optimum problem on the basis of a measure of Return On Risk Adjusted Capital and it was been possible to establish the equivalence between the optimization of the Return On Risk Adjusted Capital, when the Risk Adjusted Capital is calculated according to the Standard Formula, and the mean-variance optimizzation, according to Markowitz.
By clicking HERE you can find the abstract of the article published by Springer entitled “Capital Allocation and RORAC optimization under Solvency II Standard Formula”.
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