12 March 2010
Published in: Market risks, Regulation - supervision
CRO Forum: “Change market risk calibration”
The CRO Forum today published a damning critique of the proposed calibration and correlation factors for market risks under Solvency II and called for them to be revised. The forum - comprised of chief risk officers from the largest (re)insurance companies - also proposes an alternative calibration of the one-in-200 market stresses.
The CRO Forum had anticipated an increase in capital requirements for market risks compared to the fourth quantitative impact study (QIS4), but the report said that the proposals in the Committee of European and Insurance and Occupational Pensions Supervisors' (CEIOPS') consultation papers were "at the extreme end".
The paper stresses the need for calibration parameters to be set with a one-in-200 risk tolerance: "The calibration approach should not result in accounting for the worst shocks observed ever with the simultaneous worst possible correlations between all pair-wise risks, as observed for very short periods of time during the financial crises," it says. Further, "If parameters are calibrated to account for these ‘extreme events', the aggregate 1-200 year calibrations across all risks will be far too conservative and together, not be supported by history or what is plausible in the future."
The report continues: "More generally, the combined overall impact of all CEIOPS' suggested calibrations could be devastating for an insurer's asset mix with potential large-scale asset sales and longer term diverting capital from the European industry."
The paper is a follow-up from two CRO Forum positions papers published last year (see IERM, Regulation/supervision, 3 June, "CRO Forum stresses importance of implied volatility" and IERM, Regulation/supervision, 11 December, "Change Solvency II correlation matrices, urges CRO Forum").