Extreme Events – Specimen Question A.8.1
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Question and Answer Summary
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
(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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