From Principle-Based Risk Management to Solvency ... - Scor

Executive Summary
This SST-model documentation will give the reader of the SST report the
orientation about the origin, purpose and interpretation of the results stemming
from SCOR’s internal model . As the results of the internal model
are used by SCOR’s top management for their decision findings, a clear
understanding of the model framework should be supported by this documentation.
To mention some of the major decisions backed by the internal
model results, there are the need for the overall capital and hybrid debt
requirements (implying an assessment of the equity dimension of hybrid
instruments), the strategic asset allocation (based on different risk-return
outcomes of the company’s value depending on different asset allocations),
the capital allocation to major risk sources (based on the contributions to the
overall risk of a risk driver) and, therefore, the future direction of SCOR’s
business and, last but not least, risk mitigation measures (such as the impact
of retrocession programmes).
However, the focus of the SST-Report lies in the thorough investigation
and analysis of the Solvency capital requirements (SCR), i.e. the difference
between risk-bearing capital and target capital, based on the valuation of the
economic balance sheet of the legal entities of the company at the beginning
andtheendoftherelatedperiod.
The definitions of the terms related to the SCR are outlined in several
documents published by the FOPI (see, for instance, “Technisches Dokument
zum Swiss Solvency Test” Version 2 October 2006, p. 3/4 and also in
Part I of this documentation). In general, risk-bearing capital is measured
as the difference of the market value of assets and the best estimate of liabilities
assuming a run-off perspective after one year, even if some assets or
liabilities are not on the formal balance sheet after one year, e.g. embedded
value of the life business, whereas the target capital requirement is computed
as the difference between the expected economic risk-bearing capital at the
beginning of the period and the expected shortfall at risk tolerance level
1% of the risk-bearing capital at the end of the period under consideration
plus the cost of capital required to settle the associated run-off portfolio, i.e.
the market value margin (MVM).
Any assessment of the future development of assets and liabilities depending
on all relevant risk factors is based on a Monte Carlo simulation
xii