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

� Business for which the expected cash-flow-replicating portfolio is selected
as ORP, since the calculation (2.22) of the mismatches Mi does
not involve other instruments besides the liabilities themselves.
Up to now, we have implicitly focussed on loss cash flows. There are, of
course, further cash flows from the liabilities:premiums, external expenses,
and internal expenses.
� Premiums, external expenses: For the new business N0, these cash
flows are modeled stochastically, assuming for simplicity that they
are co-monotone with the losses. For run-off business we assume for
simplicity that premiums and expenses are constant.
� Internal administrative expenses: The SST requires these to be considered
and, in particular, that they be split into acquisition and maintenance
expenses, where the former occur only for new business and
not for run-off business. The proposed methodology to model internal
expenses is described in Section 3.10, see pp. 100.
For the different types of insurance liabilities, we describe in the following
the selection of the optimal replicating portfolios. For more details on life
business, see Chapter 4 (pp. 104). More details on non-life business are
found in Chapter 3 (pp. 41).
� Non-life business, short-duration life business: For these types of business,
we select as ORP the expected cash-flow-replicating portfolio
ERP. For short-duration life business, the conservative assumption is
made that we have full information for the new business N0 at t =1
(“fluctuation risk”), but that reserve risk nonetheless remains for the
run-off period.
� GMDB business: The optimal replicating portfolio consists of bonds,
an asset index, and European and look-back put options. The precise
derivation and composition is discussed in Section 4.7 (pp. 121).
Since the basis risk appears to be small compared to other modeling
uncertainties, it is assumed zero, and thus GMDB business is ignored
in the calculation of the MVM(1) (for a discussion of this assumption
see also Section 2.3.2).
� Life financial reinsurance: For this type of business, insurance risk is
considered immaterial, and only credit risk is considered.
� Standard long-duration life business: As described in the life liability
model part, the cover period for such business is several (many) years.
Similarly to short-duration business, it is assumed that the full information
about any one-year cover period i is available at the end of
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