In this series, we apply the magnifying glass to how the standard formulae for selected SCR sub-modules were calibrated. We investigate the history behind the calibration, the risks that were excluded from the calibration, and potential shortcomings as a result.
The South African data available to calibrate the property shock had various shortcomings, such as the limited period of data available and not differentiating by property class. As a result, it was decided to adopt the Solvency II calibration of a 25% decrease in property values. This raises questions regarding the adequacy of the calibration for South African insurers, especially those that have significant property risk exposure. An additional area of uncertainty is around where shocks on leases should be performed – whether it is appropriate to shock these under property risk, or not.
When assessing the appropriateness of the Property risk capital requirement in the SCR, the limitations of the South African data for calibration purposes should be kept in mind. In particular, at the stage of setting the shock %, only 6 years of index data was available, and it was not possible to differentiate between property classes. Additionally, volatility in property prices creates additional risk that is not explicitly capture in the standard formula. Further guidance is required on whether leases should be included in the capital risk capital requirement or not.
Reference and further reading:
This article uses information from the SAM steering committee position paper 70 – Property Risk (fsca.co.za)
Get in touch:
For assistance with evaluating the appropriateness of the standard formula and impact on your specific business, or for developing alternative internal capital stresses, reach out to us.