This brief is actually going to have two levels. One level will go with the advertised title, and I’ll tell you my current views on the truth about moral hazard and adverse selection. Adverse selection will serve as somewhat of a handmaid of moral hazard, as you will see. That’s one level....

This paper estimates insurance requirements against natural disasters (NDs) in the Eastern Caribbean Currency Union (ECCU) using an insurance layering framework. The layers include a government saving fund, as well as market instruments. Each layer is calibrated to cover estimated fiscal cost of...

We analyze the Solvency II standard formula (SF) for capital risk aggregation in relation to the treatment of operational risk (OR) capital. We show that the SF implicitly assumes that the correlation between OR and the other risks is very high, a situation which seems to be at odds with both,...

Historical VaR, CVaR and ES (Expected Shortfall) to LIQUIDATION Software is a model characterized by its straightforwardness, allowing regulators measure risk using a standard database of primitive factors and portfolio positions only, leaving little error margin in comparing market risk for...

We study regime switching features of liquidity risk in corporate bond premiums. Within a sample period ranging from July 2002 to April 2015, we first compute a liquidity risk index for BBB bonds, which considers various liquidity risk facets based on principal component analysis. Second, we...

A system is implemented that simulates a bond portfolio over the long-term of liabilities. It pays all liabilities and extracts continuously a fixed percentage of remaining liabilities to stakeholders while maintaining a strategic asset allocation. This fixed percentage is proposed as return...

The financial meltdown that began in 2007 revealed problems with the financial guarantee insurers and regulation of these insurers. Financial guarantee insurers, with business models dependent on AAA-credit ratings, were exposed to risks that threatened those ratings. These insurers had four...

The paid-incurred chain (PIC) reserving method is a claims reserving method in general insurance that allows to combine claims payments and incurred losses information in a mathematical consistent way. The main criticism on the original Bayesian log-normal PIC model presented in Merz-Wuthrich...

This technical note highlights the functioning of the profit sharing mechanism of life insurance products using the example of classical German life contracts. The profit sharing and guarantee features of these contracts are potentially very costly from a capital requirements perspective, making...