Chapter 19 ERA 2.3 Regulatory and Rating Agency Capital Adequacy Models - Witcraft

Different ways regulator regulates company’s capital adequacy

  • Leverage ratio: Premium or reserve over surplus

    • Its shortcomings: Does not distinguish between LoBs and nothing besides u/w risk

  • RBC (in the 1990s)

    • Factor model combining several risk include asset, credit, premium, reserve

    • \(\star\) Be able to criticize an example factor model

Scenario testing

  • Against scenarios from regulators

  • Can be stochastic or static

2 options to meet capital requirements:

  • Purchase reinsurance

  • Issue surplus notes