Risk Capital

Abstract

Risk capital is the capital that an insurance company holds in order to sustain major losses, should they arise. The risk capital is typically determined based on risk measures. While Chap. 2 was mainly mathematical, Chap. 4 takes a more economic point of view. The concept of cost of capital is also introduced. From an economic point of view, risk capital is linked to the value of assets and the value of liabilities. Determining the value of insurance liabilities is highly non-trivial, because typically they are not traded in a liquid marked. We give a high level overview over several approaches for defining the value of insurance liabilities. We then consider various types of risk capital and give an overview over how risk capital may be calculated in practice. Finally, we discuss in much more detail the calculation of risk capital both according to the Swiss Solvency Test and according to Solvency II. Both methods are economicly motivated and at the same time represent practical approaches to calculating risk capital.