A rating system is a decision support tool for analysts, regulators and stakeholders in order to evaluate firm capital requirements under risky conditions. The aim of this paper is to define an actuarial model to measure the Economic Capital of a life insurance company; the model is developed under Solvency II context, based on option pricing theory.
In order to asses a life insurance company Economic Capital it is necessary to involve coherent risk measures already used in the assessment of banking Solvency Capital Requirements, according to Basel II standards. The complexity of embedded options in life insurance contracts requires to find out operational solutions consistent with Fair Value principle, as defined in the International Accounting Standards (IAS).
The paper is structured as follows: Section 1 describes the development of the Insurance Solvency Capital Requirement standards; Section 2 introduces the theoretical framework of Economic Capital related to risk measures; Section 3 formalizes the actuarial model for the assessment of a life insurance company rating; Section 4 offers some results due to an application of the actuarial model to a portfolio of surrendable participating policies with minimum return guaranteed and option to annuitise.