Extreme Events – Specimen Question A.8.1

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The wording of the Solvency II Directive indicates that in the Solvency II Standard Formula SCR the operational risk charge should be added to the charge for all other risk types without any diversification offset. This means that there is little scope in practice for a less onerous approach to be adopted by any particular national insurance regulator.


(a)    You are an EU insurance regulator who does not wish to rely merely on the wording of the Directive to justify no diversification offset between operational risk and other types of risk. What other arguments might you propose for such an approach?




(b)   Conversely, you are an insurance firm which is attempting to persuade the regulator to allow it to use an internal model and you would like to be able to incorporate a significant diversification offset between operational risk and other elements of the SCR. What arguments might you propose to justify your position?




(c)    You are another EU insurance firm. Why might you have an interest in how successful or unsuccessful the firm in (b) is at putting forward its case for greater allowance for diversification between operational and other risks?




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