Solvency II Reinsurance - Counterparty default risk

The proposals to assess counterparty default risk within the Solvency II project lead to undesirable comparative results. Several shortcomings can be overcome by replacing value-at-risk by conditional value-at-risk, and this new capital requirement can be well approximated by a simple analytic expression. By Werner Hurlimann

Solvency II, the new risk-based solvency and supervisory standard for European reinsurance companies, is planned to be introduced in 2012. The recent Quantitative Impact Study, QIS3 (2007), developed a new module for assessing counterparty default risk, initially focused on reinsurance counterparty defaults, using a particular capital charge formula. After criticisms of this approach, for example by Sachs (2007) and ter Berg (2008), the revised QIS4 (2008) widened the focus to include more

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