Insurers explore 'risk geographies' for capital modelling

Insurers are looking at new ways to model their capital requirements. Risk geographies is one method being explored by some insurers. While the technique can be a powerful tool, it does present some implementation challenges. Clive Davidson reports

The fundamental idea of solvency capital is to ensure that a company has the resources to survive a worst-case scenario – a crisis or period of stress that threatens its viability. Solvency II defines the worst case as a one-in-200-year event and provides a standard formula for calculating the capital necessary to absorb the subsequent losses, or allows insurers to use their own models to do so.

Solvency II acknowledges that the standard formula or internal model cannot fully capture the risks