In recent years we have witnessed a sudden increase in national and international regulation that seeks stricter oversight on financial markets. The growing awareness of various financial risks has ultimately led to increased attention for the concept of risk-based capital (RBC) or economic capital (ECAP).

RBC or ECAP is the buffer a company needs in order to cope with unexpected losses at an acceptable level of certainty, over for example a period of one year. This concept also plays a central role in the solvability tests inherent to the new Solvency II guidelines. Under Solvency II the various risks on the balance of an insurance company are labeled and evaluated. This goes for both the active (e.g. credit risk, share risk, etc.) and passive side of the balance (such as long life risk, mortality risk, etc.). For each of these risk types a so-called buffer must be calculated which aggregates to the total required capital the insurance company must hold.

Solvency II calculations can be performed based on full stochastic simulation techniques, and also for example on a number of deterministic shock scenarios. Because the components required for such calculations (e.g. market value liabilities and economic scenarios) are standard features in the ALM model of Ortec Finance, this model can be superbly used to evaluate the development of the solvency position under Solvency II guidelines.