How do the two modelling frameworks compare? I spent some time developing PD LGD and EAD models for banking portfolios... But I never did insurance modelling project which I suspect is based on Solvency II?
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There is a brief discussion of the two modelling frameworks in An Introduction to Economic Capital by Mohan Bhatia in the "Insurance Risk" chapter. To pull a quote from the "Solvency II versus Basel II" section of that chapter:
Like the regulatory approach to internal models in Basel II, Solvency II aims to bring the internal modelling approaches within the regulatory framework by adopting the following best practices:
- consistency in models being used for pricing and capital computation;
- coverage of risks—all material risks to be captured, more granular assessment of risks; and
- documentation of the model, covering theory, design, operation, compliance and shortcomings; and disclosure about the model to cover distribution and its variability, underlying data, calibration, appropriateness and fit.
In the same section it also states that unlike Basel II, "the correlation between risk components is explicitly recognized by Solvency II." On p. 106 another comparison is made, saying that "Solvency II has adopted the Basel II operational risk management framework."
Some sets of presentation slides comparing the two frameworks can be found here:
- Solvency II and Basel II—What can actuaries learn? (Omar Ripon and Martin Noble)
- Economic Capital Models for Basel/Solvency II, Pillar II (Alexander J. McNeil)
Finally, an overview of the Solvency II framework can be found in the Deutsche Bank Research publication Solvency II and Basel III: Reciprocal effects should not be ignored. However, the main topic of this publication is how implementation of Solvency II and Basel III will affect insurance company investment behavior and capital allocation, along with affecting banks' funding.
answered May 18, 2012 at 13:21