From the cover: “Reflecting the author’s wealth of experience in this field, Handbook of Solvency for Actuaries and Risk Managers: Theory and Practice focuses on the valuation of assets and liabilities, the calculation of capital requirement, and the calculation of the standard formula for the European Solvency II project. ... A one-stop shop for actuaries and risk managers, this handbook offers a complete overview of solvency and the European Solvency II standard formula. It gives a clear definition and broad historical review of solvency and incorporates a comprehensive discussion of the theory behind the calculation of the capital requirement.”
Part A (Solvency Introduction) gives an overview what solvency means. It starts with the ideas and then gives a historical review: the classical approach and the approach from financial mathematics. Then it explains the ideas behind the European Solvency II project. Several approaches to risk management and asset liability management are introduced. In particular, the different approaches to enterprise risk management are given.
Part B (Valuation, Investments, and Capital) explains the several approaches to measure assets and liabilities. For example, diversification is discussed as well as the prediction of future payments, i.e. reserves for claims that already occurred but are not settled yet.
Part C (Modeling and Measuring) is in my eyes the most important. First, it is discussed how to develop a model. Linear and higher order approximations are introduced and applied to risk models. Then copulas are introduced for the approximation of dependencies. The common copula based dependence measures are given. It is nice that the author does not consider the frequently used correlations, which are not translation invariant. The main classes of copulas are discussed, with graphs showing their bivariate behaviour. A separate chapter discusses estimation and model testing questions. The next part deals with risk measures, in particular VaR and TailVaR. It is shown how capital requirements can be modelled and measured. The two main ideas, i.e. the top-down and the bottom-up approach, are introduced. The last part discusses the main risk classes. In particular, market, credit and underwriting risk are discussed, since they are the mostly studied risk types in actuarial sciences.
Part D (European Solvency II General Ideas, Valuation and Investment: Final Advice) explains the ideas behind Solvency II and how it is working. Part E (European Solvency II Standard Formula: Final Advice) explains the standard formula framework and the ideas behind the standard formula. After a general discussion, the standard formula for each of the risk classes is given and explained. The book ends with the large Part F (Background and Calibrations), where lots of background information concerning the Solvency II project are given, including statistics and the historical development.
Since risk management is a very actual topic in actuarial science, this book is a must for any actuary and risk manager in insurance. It gives a comprehensive overview on all the relevant material concerning Solvency II. This makes the book also valuable for researchers working in the direction of risk management. Many graphs illustrate the theoretical background. Simple explanations are given, and most formulae are without proof. This makes it understandable for anybody working in the field. An extensive list of references gives more material. In particular, a researcher may find there hints to the proofs and the background theory behind the formulae.