ABSTRACT
THE IAIS (2007a) has suggested that RFs and their distinct components should berepresented within the MVL, in the LRM, and in the SCR, as follows: • Risk that is to be reflected both in the LRM and in the capital requirement:
• Uncertainty and residual market volatility in underwriting risk (UR)
• Unhedgeable mismatch risk
• Risk that is reflected only in the capital requirement and not in the LRM:
• Volatility other than residual market volatility in UR
• Hedgeable mismatch risk
One way of distinguishing between risks taken care of in the risk margin, LRM, with a time horizon to the ultimate, and the SCR, with a short time horizon, say T = 1 year, is to use the mean square function; cf. Chapter 5 and Section 6.4.
