When the SST Standard Model Underestimates Market Risk

This paper1is the report of an experiment. Every year all the companies under the supervision of the Swiss Federal Office for Private Insurance (FOPI) deliver the sensitivities of their portfolios to a set of predefined risk factors. Out of these sensitivities it is possible to compute the risk measures for market risk and the resulting capital requirement. Using a linear approximation, these measures can be computed analytically. Given these sensitivities, it is also possible to include the convexity effect using a Monte Carlo simulation. The results show that the SST Standard Model is unsuitable for all the Life companies since it substantially underestimates risk.