Understanding the SCR Risk Components Calibration, Shortcomings & Risks Not Considered

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. We also investigate the impact of alternative calibrations with updated, South Africa specific data.

This article on Currency risk is PART VI of the series. Mortality, Retrenchment, Property, Expense and Equity risks were covered in PARTS I to V.

Summary

Currency Risk is a component of the Solvency Capital Requirement (SCR) for all life and non-life insurers. The calibration of the currency standard formula as per the Prudential Authority Financial Soundness Standards for Insurers (FSI) 4.1 is dependent on the data sets and assumptions as at the time of calibration. Since then, we have 10 years worth of additional data on which to base the calibration and assumptions. In this article, we investigate how the currency risk calibration would have changed allowing for the additional years of data.

This article is recommended reading for Head of Actuarial functions forming opinions on the adequacy of the SCR standard formula. In a wider sense, this article contains useful information for anyone wishing to understand the calibration, shortcomings and possible alternatives updates of the currency risk standard formula.