Investigating parameter risk for Solvency II and ICAS
Internal models are incentivised under Solvency II by the potential to lower capital requirements, but are subject to a number of risks. Parameter risk is one that has got scant attention. This article demonstrates that the primary source of parameter risk for annuity providers is the direction of future trends, and argues that insurers should hold additional capital accordingly
"The longevity shock to be applied is a (permanent) 25% decrease in mortality rates for each age."
Ceiops (2008) TS.XI.C.6
"Such parameters shall be calibrated on the basis of the internal data of the undertaking concerned, or of data which is directly relevant for the operations of that undertaking using standardised methods."
Article 104, Commission of the European Communities (2008)
"A firm should identify and justify key assumptions and document the sensitivity of the results to these
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