Implementering af value-at-risk i Solvency II: En intern models beregningsgrundlag for kapitalkravet til markedsrisiko i et livsforsikringsselskab

Niels Lodsgaard & Simon Slot

Student thesis: Master thesis

Abstract

By 2012 European insurance companies and pension funds will be faced with the new Solvency II regulation, which is currently under development in the European Union. This thesis investigates the use of Value-at-Risk as a tool to measure market risk in a life insurance company, both from a theoretical point of view and through a case based on the Danish life insurance company Alm. Brand Liv & Pension A/S. From an economical point of view the arguments for regulating the insurance industry are solid. Based on several studies it has been proved that the insurance market is not perfect, and therefore governmental regulation is beneficial for the insurance customers. Solvency II provides the insurance companies with the opportunity to develop internal models to measure their risks, and since it is expected that most companies will get a lower solvency capital requirement with an internal model than with the standard model, most of them will develop internal models. The widest used tool for measuring market risk in financial institutions has for a number of years been Value-at-Risk, and research conducted by the Committee of European Insurance and Occupational Pensions Supervisors (CEIOPS) shows that the majority of the internal models will be based on Value-at-Risk. Value-at-Risk is a risk measurement tool that measures risk as a single amount, based on a given confidence level within a given time period. This thesis studies the different assumptions made by the various Value-at-Risk models, and analyses the case data in respect to these assumptions. Furthermore various Value-at-Risk models are presented, and their strengths and weaknesses are examined. Based on the thesis, it is concluded that the simulated historical delta-gamma Value-at-Risk is the most suitable for the case company, because of the accuracy of the model compared to its computation requirements, without having a level of cyclicality that is too high. Value-at-Risk is, despite its shortcomings, a powerful tool that gives a great overview of the risk of a company, while it also serves as a strategic tool that enables managers to oversee the company, and therefore make better decisions. This is also the main focus of the Solvency II framework, and a reason why the implementation of internal models can be an important step towards improved risk management, ultimately linking the implementation of internal models to increased profits.

EducationsMSc in Finance and Accounting, (Graduate Programme) Final Thesis
LanguageDanish
Publication date2009
Number of pages138