The Calibration Standards

Ishtiaq Faiz and Paolo Cadoni

Under Solvency II, firms using an internal model to calculate the solvency capital requirement (SCR) may derive the SCR using a different time period or risk measure from that set out in Article 101 of the directive,11 For further details, see European Parliament and the Council of the European Union (2009). as long as they demonstrate to the supervisory authorities that policyholders and beneficiaries are provided with an equivalent level of protection.22 Namely, it shall correspond to the value-at-risk of the basic own funds of an insurance or reinsurance firm subject to a confidence level of 99.5 % over a one-year period. These requirements are known as the calibration standards.

The Solvency II definition of calibration is different from the general definition of calibration used in statistics and actuarial science. For example, model calibration is often defined in statistics as the process of adjustment of the model parameters to obtain a model representation of the processes of interest that satisfies pre-agreed criteria (eg, goodness of fit).

The Solvency II definition of calibration, on the other hand, specifically refers to:

    • conditions under which other

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