Financial services firms are in the business of accepting risk. To be able to fulfil this role, they must understand the risks involved and put in place adequate measures to mitigate them. Traditionally, the amount of capital has been prescriptive in nature and set out by the regulators. With the advent of modern risk management techniques, regulators are moving towards a risk-based capital approach, with different regulations for banks (Basel II) and insurance firms (Solvency II).
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