Risk-based valuations and solvency capital measurement. For a long time, many (re)insurance companies have realized the need for risk-based valuations and solvency capital measurement and have started developing internal economic capital models which suit their needs. This is without prompting from regulators and rating agencies. Why? Such models provide a common measurement basis across all risks (e.g. same methodology, time horizon, risk measure, level of confidence, etc.) and are a powerful tool for strategic decision-making, for example in capital allocation and pricing. In short, the CRO believes internal models are a powerful tool to enhance company risk management and to better embed risk culture in the company. Yet, internal models continue to come under considerable criticism and suspicion. The financial crisis, of course, has only exacerbated these issues and concerns.
