Capital Management
RiskShield Capital Model.
Last updated
RiskShield Capital Model.
Last updated
Although RiskShield is not an insurer, neither is it in the business of providing insurance, arranging insurance contracts, nor is it acting as an insurance agent, it is nonetheless appropriate and indeed desirable for RiskShield to adopt the highest possible capital management standards available to manage its capital pools in the interest of the RiskShield community. RiskShield's capital model refers to EIOPA's Solvency II, the prudential regime for undertakings in the EU. Solvency II sets out the requirements applicable to insurance and reinsurance companies to ensure that adequate protection is provided to policyholders and beneficiaries.
At its core, Solvency II adopts an economic risk-based approach that assesses the "overall solvency" of undertakings through quantitative and qualitative measures. The assessment includes the undertakings' risk profiles, how risks are managed, whether the right incentives for sound risk management practices and transparency are in place, etc.
There are different tiers of capital requirements under Solvency II, namely the Solvency Capital Requirement (SCR) and Minimum Capital Requirement (MCR). SCR refers to the capital required to ensure that the undertaking will be able to meet its obligations over the next 12 months with a probability of at least 99.5%. MCR refers to the capital required by the undertaking to meet its obligations over the the next 12 months with a probability of at least 85%, and is range bound between 25% and 45% of SCR. SCR and MCR can be regarded as "soft" and "hard" floors.
The capital pool is the foundation of RiskShield's protection capabilities. The capital pool is built by funds accumulated by the RiskShield protocol's underwriting mining pools, cover payments, and investment pool, all of which are governed by $RSY tokenholders.
The Investment portal is still under development. It will be launched soon. Please stay tuned.
The SCR is the amount of funds that are required to hold to ensure that the undertaking can meet its obligations to cover policyholders over the next 12 months with a 99.5% probability, which limits the possibility of falling into financial ruin to less than once in 200 cases. RiskShield uses SCR as the capital management standard to calculate the minimum required amount of funds set aside to pay all the potential claims considering all quantifiable risks. SCR is calculated with the following factors/inputs:
All the active covers
All the outstanding claims
The potential incurred but not reported claims
The market currency shock risk
The non-life payments & reserves, lapse and catastrophe risks
The potential operational risk
The SCR calculation runs on a daily basis. The team will review and update it to on-chain only if there is a noticeable change in the required capital requirement.
The SCR% is the ratio of capital that the undertaking has available to support its SCR. It is also known as Capital to Risk Assets Ratio which measures the ratio of a company's capital to its risk. SCR% is calculated by the following formula:
SCR% = Capital Pool Size / SCR
👉 A high ratio means the company is financially strong with sufficient available funds to cover potential claims and other risks so the company is less likely to be insolvent
👉 The lowest acceptable ratio is 100%.
👉 The real-time value of Capital Pool Size, SCR and SCR% can be found on the data page.
The Capital Efficiency Ratio (CER%) is the ratio of output per amount of capital dedicated to the operation of a business or a product line. This ratio serves as a way to measure a company's short-term or current success in deploying capital.
At RiskShield, CER% is calculated by the following formula:
CER% = Active Cover Amount / Capital Pool Size
👉 A high ratio means the company is increasing the productivity of its assets to generate income.
👉 The desirable ratio should be between 100% and 300% to have high productivity and with moderate risk exposure.
👉 The real-time value of Capital Pool Size, Active Cover Amount and CER% can be found on the data page.
