Details
| Original language | English |
|---|---|
| Pages (from-to) | 191-200 |
| Number of pages | 10 |
| Journal | Insurance: Mathematics and Economics |
| Volume | 82 |
| Early online date | 18 Apr 2018 |
| Publication status | Published - Sept 2018 |
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.
Keywords
- Corporate networks, Distortion risk measures, Group risk, Range value at risk, Risk sharing, Solvency II, Value at risk
ASJC Scopus subject areas
- Mathematics(all)
- Statistics and Probability
- Economics, Econometrics and Finance(all)
- Economics and Econometrics
- Decision Sciences(all)
- Statistics, Probability and Uncertainty
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In: Insurance: Mathematics and Economics, Vol. 82, 09.2018, p. 191-200.
Research output: Contribution to journal › Article › Research › peer review
}
TY - JOUR
T1 - Solvency II, or how to sweep the downside risk under the carpet
AU - Weber, Stefan
PY - 2018/9
Y1 - 2018/9
N2 - 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.
AB - 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.
KW - Corporate networks
KW - Distortion risk measures
KW - Group risk
KW - Range value at risk
KW - Risk sharing
KW - Solvency II
KW - Value at risk
UR - http://www.scopus.com/inward/record.url?scp=85048727538&partnerID=8YFLogxK
U2 - 10.48550/arXiv.1702.08901
DO - 10.48550/arXiv.1702.08901
M3 - Article
VL - 82
SP - 191
EP - 200
JO - Insurance: Mathematics and Economics
JF - Insurance: Mathematics and Economics
SN - 0167-6687
ER -