Standard Formula for Solvency II

Question

I am qualified in Mathematics and Physics but would like to have a career in Finance. I will be starting an M.Sc. In Financial Mathematics next October but am already reading about certain topics to prepare for a particular job interview with a national financial regulator that might consider me if I am lucky enough. I will need to show an understanding in Solvency II (the EU directive) for Insurance companies. The "Standard Formula" and "Stress Testing" were mentioned specifically. Reading about them, I encountered the following: https://hal.archives-ouvertes.fr/hal-00403662v2/document

It contains the following:

Denote

$(F_t)_{t\geq0}$ - the filtration that permits to characterise the available information for each date;

$\delta_u$ - the discount factor that is expressed with the instantaneous risk free interest rate $r_u=\delta_u=e^{-\int_0^ur_h\,dh}$;

$P_t$-the cash-flows of the liabilities (claims, commissions, expenses) for the period t;

$R_t$ - the profit of the company for period t.

Equity $E_0$ and the fair value of the liabilities at the start date, $L_0$, are calculated in the following manner:

\begin{eqnarray} L_0=E_Q\left[\sum_{u\geq1}\delta_u\cdot P_t\vert F_0\right] \end{eqnarray}

and

\begin{eqnarray} E_0=E_Q\left[\sum_{u\geq1}\delta_u\cdot R_t\vert F_0\right] \end{eqnarray}

I need some guidance, perhaps a book or website to better understand these terms which are new to me. Any help would be greatly appreciated - even some real-life experiences to prepare me for what I should expect. Is there software that calculates these? Thanks a lot.

Answer 1

Your link refers to a paper that compares the Standard Formula (prescribed approach to SII calculations) and Internal Models (where companies apply to use their own approach for deriving capital requirements). It is an old paper (2009). My suggestion would be to start by taking a look at the latest Technical Specs (30th April 2014) and navigate any additional papers of interest as per this guide.