Realisable group diversification effects
This paper proposes a new bottom-up approach for realising diversification benefits using some predetermined capital and risk transfer instruments, taking counter-party default risk into account
The impact of capital mobility restrictions on the acknowledged diversification benefit of the internal model of an insurance group, or any financial conglomerate, is an important topic in the Solvency II discussion, see for example Section 6 in the recent CEIOPS document (2007). It is generally accepted that for diversification to work at a group level, capital needs to flow freely between business units. Regulators, rating agencies and local companies management may constrain this fungibility
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