27.12 A Framework for Assessing Risk Margins - K. Marshall et al.

\(\star\) Correlation

  • The 3 main risk sources are independent of each other and therefore can be sum with square root rule (12.2)

  • Independent (12.3):

    Assume independence across lines, weight by liabilities

  • Internal (12.4):

    Base on correlation matrix \(\Sigma\), again weighted by liabilities

  • External (12.5) & (12.6):

    Correlation between each valuation group and risk categories \(\Rightarrow\) then roll up to the risk categories and assume they are independent of each other

Risk Margin: (12.7)