6
General assumptions
6.1
A firm's management should determine their own risk appetite or confidence level and a risk measure that they believe is suitable for the management of the business. Firms should however consider Chapter 8 of this statement.
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6.2
A firm should be able to explain its rationale for choosing its approach to risk and assessment of capital.
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6.3
A firm should be able to evidence the reasoning and judgements underlying its assessment and, in particular, justify the:
- assumptions used;
- appropriateness of the methodology used; and
- results of the assessment.
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6.4
A firm should also be able to identify the major differences between the assessment at a confidence level of 99.5% over one year and any other assessments carried out using a different confidence level.
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6.5
Key parameters and assumptions should be reviewed regularly. A firm should consider the relevance of the data and the nature and value of any expert judgement used to support the choice of these assumptions especially where these data and judgement determine the most financially significant assumptions and provide justification for the calibration of these assumptions.
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6.6
Where relevant, a firm should consider all risks in aggregate if intending to make appropriate allowance for diversification when completing its capital assessment. A firm should be able to describe and explain any diversification benefits allowed for.
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6.7
Where there is a concentration of business from a single source (for example, a single sales channel or cedant), consideration should be given to the greater impact of a risk crystallising, compared to that for a well-diversified portfolio.
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