Comparative Study on diversification in internal models

Diversification modelling consists in offsetting the adverse outcome from one set of risks by a more positive outcome from a different set of risks. This offsetting typically has a material impact on the overall level of capital required for the insurance undertakings when risk capital requirements are aggregated.

The study published today provides an overview of the current modelling approaches and equips National Competent Authorities with elements of a European sector-wide comparison as well as various diversification indicators that are intended to support and complement the work of national supervisors when monitoring the on-going compliance of internal models.

The study uses a variety of metrics and analyses, each with its strengths and weaknesses, to obtain a holistic view on diversification within internal models. In particular, it highlights that different models of aggregation of risks lead to a sizeable dispersion in the capital requirements even for undertakings with similar business profiles.