The standard formula of Solvency II: a critical discussion (Q825282)

The authors perform analysis and survey of model-theoretical aspects of the standard formula (SF) for Solvency II regulation of European insurance market. \newline The formula has to acknowledge different business models, national peculiarities and supervisory objectives. Its derivation must follow a simple procedure to be easy for using by the insurance community. Also, SF should be risk-sensitive. \newline Compared to Solvency I, the SF of Solvency II is a significant improvement, as the requirements are better realized. However, stochastic model underneath the SF is still subject to considerable uncertainties; so that the probability functional of the SF is exposed to significant model risk. \newline The absence of mathematical structure makes the use of the SF as a tool of control somewhat delicate. It does not seem adequate to use the SF as a benchmark for internal models, because the model uncertainty of the SF is not estimable.