"The capital-on-capital cost in solvency II risk margin" by Anna Maria Gambara

Topic

The presentation explores advancements in time-consistent valuation of insurance liabilities, focusing on the concept of capital-on-capital cost and its implications for revising risk margin (RM) calculations. Capital-on-capital is defined as the component of RM required to cover risks associated with future regulatory capital variations, distinct from liability cash-flow uncertainties. We introduce a mathematical framework comparing two valuation approaches: one using backward iteration of the one-period SCR risk measure and another based on the additive-SCR (ASCR), a novel dynamic formulation representing expected total capital requirements until maturity. Through application to a portfolio of long-term equity-linked life insurance contracts, we demonstrate the non-negligible role of capital-on-capital costs in liabilities with long maturities. The findings provide practical insights into RM calculations and regulatory capital management.