Benchmarking capital charges


Jim Bachman, Tobias Gummersbach and John Loughrey

Jim Bachman, Tobias Gummersbach and John Loughrey of GR-NEAM, offer a ‘top-down observable price’ approach to benchmarking.

Regulators have legislative responsibility to establish solvency standards for insurers. Rating agencies have a commercial interest in providing a framework to gauge insurers’ capital adequacy. For each the focus is to assign capital charges to the various activities of insurers, tally their accumulation and conclude the need for regulatory intervention or assigning a financial rating, respectively.

Two developments give us pause to review capital charges of different regulatory and rating agency regimes. The first is the creation of the US Federal Insurance Office. The second is EIOPA’s most recent publication addressing underlying assumptions of the Solvency II Standard Model Formula (SII). 

The focus of this article is the investment capital charges developed within the SII and, in particular, contrasted to the charges developed using GR-NEAM’s ‘top-down observable price’ methodology. We highlight these differences using the security level holdings of the US property/casualty (P/C) industry.

GR-NEAM, benchmarking, regulation, ratings agencies, SII

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