A FINMA-approved solvency model in group-wide production.

For a multinational insurer, the contagion model quantifies how defaults and rating migrations propagate through ownership, internal reinsurance and guarantees, changing each legal entity's regulatory solvency.

From connected balance sheets to solvency by legal entity

To assess group solvency, the insurer needed to consider not only each entity individually, but also the dependencies between them. Ownership positions, internal reinsurance and guarantees connect the balance sheets of the legally separate entities. A loss or default can therefore change the equity and solvency of several entities at once.

The existing group risk model comprises separate models for market movements, natural catastrophes, and life and non-life insurance risks. Each of these models produces a distribution of possible effects. The group risk model aggregates them into a joint distribution across all legal entities, from which the pre-contagion balance-sheet scenarios are drawn.

This starting distribution was the input to the contagion model developed in the project. It revalues the intragroup positions in each scenario and repeats the calculation until it reaches a consistent fixed point. This produces an outcome distribution for each legal entity that includes the intragroup knock-on effects.

The computationally intensive core of the contagion model was implemented as a parallelised C++ component and integrated directly into the existing R-based group risk process. This made it possible to calculate the intragroup knock-on effects reproducibly across the full scenario distribution. FINMA approved the contagion model; it is in production and used group-wide.

Swiss Solvency Test · earlier founder project

Calculating intragroup solvency effects

The four steps show how the contagion calculation turns the joint starting distribution from the existing group risk model into a distribution that includes intragroup knock-on effects. Three legal entities and 20 synthetic scenarios illustrate the calculation.

Group structure

An insurance group consists of multiple legally separate entities. Each legal entity has its own balance sheet. Ownership, internal reinsurance and guarantees create claims and obligations between them. These relationships determine how financial effects can propagate between legal entities. The contagion calculation represents them as a network.

B
Legal entity BBalance sheet detail
Assets
Liabilities + equity
External assets
  • government & corporate bonds
  • listed equities
  • cash and deposits
Internal assets
  • ownership stakes in other group entities
  • internal reinsurance recoverables
  • guarantees from other entities
External liabilities
  • insurance reserves
  • external debt
Internal liabilities
  • internal reinsurance obligations
  • guarantees given to other entities
Equity
AssetsLiabilitiesEquityOwnership stakeGuaranteeReinsurance
Project profile
Project context
Before Nuitio
Monte Carlo simulationFixed-point iterationRC++Swiss Solvency TestSolvency II
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