Solvency II: Calibration for skewness

Arne Sandström

Scandinavian Actuarial Journal, 2007, vol. 2007, issue 2, 126-134

Abstract: The standard formula for the calculation of the capital requirement within the EU's Solvency II project will be modular based. Each capital charge from the modules will be calculated consistent with the overall capital charge, i.e. with the same risk measure, the same confidence level and time horizon. If any of the underlying probability distributions are skewed, then the model must be calibrated for that to retain the consistency. This paper proposes and discusses one way of calibrating for skewness. The main objective of the paper is to show, by two simple examples, the effect of not calibrating for skewness if some of the underlying distributions are skew.

Date: 2007
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DOI: 10.1080/03461230701250481

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