Abstract
The European Directive 2009/138 of Solvency II requires adopting a new approach based on risk, applying a standard formula as a market proxy in which the risk profile of insurers is fundamental. This study focuses on the fire risk sub-module, framed within the man-made catastrophe risk module, for which the regulations require the calculation of the highest concentration of risks that make up the portfolio of an insurance company within a radius of 200 m. However, the regulations do not indicate a specific methodology. This study proposes a procedure consisting of calculating the cluster with the highest risk and identifying this on a map. The results can be applied immediately by any insurance company, covered under the Solvency II regulations, to determine their maximum exposure to the catastrophic man-made risk of fire, instantly providing them with the necessary input for calibration of the solvency capital requirement.
Highlights
The management of an insurance company is based on its capacity, present, and future, to meet its commitments
The Directive is structured around three pillars closely linked to each other and very similar to those harmonized by the banking sector in Basel II/III: risk-based capital requirements (Pillar I), enhanced governance (Pillar II), and increased transparency (Pillar III)
This paper focuses on the risk of man-made disasters where capital requirement must would be divided among competitors in the insurance market, man-made be calibrated at 99.5%
Summary
The management of an insurance company is based on its capacity, present, and future, to meet its commitments. Traditional rating procedures do not work for catastrophic risks due to the usually very low frequency of loss events. These risks are the ones that the current legislation and the new European regulatory framework [1] known as Solvency II, whose principles revolve around the concept of solvency, try to capture. The primary objective of solvency capital requirements is to ensure an optimal capital level that allows insurance companies to face unforeseen losses while ensuring policyholders’ protection. This paper proposes a methodology that allows the calculation of solvency capital related to fires’ concentration risk, framed in man-made risk catastrophe of non-life underwritten insurance
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