Capital allocation and RORAC optimization under solvency 2 standard formula
Solvency II Directive 2009/138/EC requires an insurance and reinsurance undertakings assessment of a Solvency Capital Requirement by means of the so-called “Standard Formula” or by means of partial or full internal models. Focusing on the first approach, the bottom-up aggregation formula proposed by the regulator allows for a capital reduction due to the diversification effect, according to the typical subadditivity property of risk measures.