Template-Type: ReDIF-Article 1.0
Author-Name: Zoltán Zubor
Author-Workplace-Name: Magyar Nemzeti Bank
Author-Email: zuborz@mnb.hu
Title: Volatility capital buffer to prevent the breach
of the Solvency II capital requirements
Abstract: The Solvency II regulation prescribes continuous capital adequacy, despite the
fact that insurance companies only determine their capital adequacy in a reliable
manner once annually. The volatility capital buffer1 (VCB) is meant to guarantee
that, despite the higher volatility arising from the market valuation, at a given ?
confidence level the solvency capital of insurers meets the capital requirement on
a continuous basis. This paper reduces the problem to the search of the probability
distribution quantile belonging to the ? confidence level (VaR?), the 99.5 per cent
quantile of which is the solvency capital requirement (SCR) specified in the Solvency
II Capital Regulation, and thus the VCB can be expressed as a percentage of the SCR.
Without the assumptions related to the distribution, any value may be obtained
for the VCB ratio, but it can be squeezed into a relatively narrow band even under
natural assumptions. On the one hand, the analysis of these distribution groups
may further narrow the possible values, and on the other hand it points out that in
the case of fatter-tailed distributions (when major, extreme losses may also occur
more frequently) and positive skewness (when the probability of the loss is smaller
than that of the profit, but the value thereof is expected to be higher), we obtain
a lower VCB ratio.
Classification-JEL: C13, C46, G22
Keywords: Solvency II, volatility, capital buffer, loss ddistribution, quantile,
confidence level
Journal: Financial and Economic Review  
Pages: 91–123
Volume: 15
Issue: 1
Year: 2016
File-URL: http://english.hitelintezetiszemle.hu/letoltes/5-zubor-1.pdf
File-Format: Application/pdf
Handle: RePEc:mnb:finrev:v:15:y:2016:i:1:p:91-123