Sound risk management approaches require a full “dashboard” of instruments to measure, monitor and budget risks. There is not one single metric to measure and manage risks, but a full suite of metrics should be at the disposal of the professional risk manager. The metrics range from not-to-be-underestimated qualitative approaches to highly sophisticated quantitative approaches, e.g., the determination of the reaction of the portfolios to different relevant (extreme) scenarios (or sensitivities) or the determination of required capital, as required for solvency purposes by some regulators. In this document we will focus on required capital and present a new main-risk-factor-based approach to capital allocation.
This article was originally published in the February 2014 issue of Der Aktuar.