RecessionRisk<sup>+</sup>: A Novel Recession Risk Model with Applications to the Solvency II Framework and Recession Crises Forecasting
The Solvency II regulatory framework requires European insurance companies to guarantee their solvability and stability by retaining enough Own Funds to cover future unexpected losses at a given confidence level. A Standard Formula approach is provided to estimate the capital requirement needed. Sti...
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MDPI AG
2024-11-01
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| Series: | Mathematics |
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| Online Access: | https://www.mdpi.com/2227-7390/12/23/3747 |
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| author | Jacopo Giacomelli Luca Passalacqua |
| author_facet | Jacopo Giacomelli Luca Passalacqua |
| author_sort | Jacopo Giacomelli |
| collection | DOAJ |
| description | The Solvency II regulatory framework requires European insurance companies to guarantee their solvability and stability by retaining enough Own Funds to cover future unexpected losses at a given confidence level. A Standard Formula approach is provided to estimate the capital requirement needed. Still, Solvency II allows internal methodologies to quantify the capital absorption arising from specific risk types or even to replace the Standard Formula with a full internal model. This work proposes a new internal model approach to measure the Catastrophe Recession Risk. The Recession Risk implies a mandatory capital absorption component for the insurance companies operating in the credit and suretyship business. The proposed model is based on the CreditRisk<sup>+</sup> model and designed to behave countercyclically, aligning with the original intent of the European supervisory authority when first introducing this risk into the Solvency II risks’ taxonomy. Additionally, the model is applied to define an index for monitoring future recession crises based on the time series of past default rates. |
| format | Article |
| id | doaj-art-5c6c87fd0dcb48818b87f5fe475d1ddb |
| institution | Kabale University |
| issn | 2227-7390 |
| language | English |
| publishDate | 2024-11-01 |
| publisher | MDPI AG |
| record_format | Article |
| series | Mathematics |
| spelling | doaj-art-5c6c87fd0dcb48818b87f5fe475d1ddb2024-12-13T16:27:37ZengMDPI AGMathematics2227-73902024-11-011223374710.3390/math12233747RecessionRisk<sup>+</sup>: A Novel Recession Risk Model with Applications to the Solvency II Framework and Recession Crises ForecastingJacopo Giacomelli0Luca Passalacqua1SACE S.p.A., Piazza Poli 42, 00187 Rome, ItalyDepartment of Statistics, Sapienza University of Rome, Viale Regina Elena 295, 00161 Rome, ItalyThe Solvency II regulatory framework requires European insurance companies to guarantee their solvability and stability by retaining enough Own Funds to cover future unexpected losses at a given confidence level. A Standard Formula approach is provided to estimate the capital requirement needed. Still, Solvency II allows internal methodologies to quantify the capital absorption arising from specific risk types or even to replace the Standard Formula with a full internal model. This work proposes a new internal model approach to measure the Catastrophe Recession Risk. The Recession Risk implies a mandatory capital absorption component for the insurance companies operating in the credit and suretyship business. The proposed model is based on the CreditRisk<sup>+</sup> model and designed to behave countercyclically, aligning with the original intent of the European supervisory authority when first introducing this risk into the Solvency II risks’ taxonomy. Additionally, the model is applied to define an index for monitoring future recession crises based on the time series of past default rates.https://www.mdpi.com/2227-7390/12/23/3747credit riskrecessionrisk managementSolvency IIsuretyship |
| spellingShingle | Jacopo Giacomelli Luca Passalacqua RecessionRisk<sup>+</sup>: A Novel Recession Risk Model with Applications to the Solvency II Framework and Recession Crises Forecasting Mathematics credit risk recession risk management Solvency II suretyship |
| title | RecessionRisk<sup>+</sup>: A Novel Recession Risk Model with Applications to the Solvency II Framework and Recession Crises Forecasting |
| title_full | RecessionRisk<sup>+</sup>: A Novel Recession Risk Model with Applications to the Solvency II Framework and Recession Crises Forecasting |
| title_fullStr | RecessionRisk<sup>+</sup>: A Novel Recession Risk Model with Applications to the Solvency II Framework and Recession Crises Forecasting |
| title_full_unstemmed | RecessionRisk<sup>+</sup>: A Novel Recession Risk Model with Applications to the Solvency II Framework and Recession Crises Forecasting |
| title_short | RecessionRisk<sup>+</sup>: A Novel Recession Risk Model with Applications to the Solvency II Framework and Recession Crises Forecasting |
| title_sort | recessionrisk sup sup a novel recession risk model with applications to the solvency ii framework and recession crises forecasting |
| topic | credit risk recession risk management Solvency II suretyship |
| url | https://www.mdpi.com/2227-7390/12/23/3747 |
| work_keys_str_mv | AT jacopogiacomelli recessionrisksupsupanovelrecessionriskmodelwithapplicationstothesolvencyiiframeworkandrecessioncrisesforecasting AT lucapassalacqua recessionrisksupsupanovelrecessionriskmodelwithapplicationstothesolvencyiiframeworkandrecessioncrisesforecasting |