### Difference between Diversified and Undiversified SCR

Difference between Diversified and Undiversified SCR – Solvency II Before reading this article, kindly read the following 2 articles to make the most sense out of it: Solvency II - Phase 1 Solvency II - Phase 2 - Solvency II SCR is a Value at Risk measure, it can be calculated via Standard formula as well as via Internal Model - VaR is calculated for each component risk, then the diversified SCR is determined with reference to the correlation between each component. This is done by taking the sum over all risks of the square root of the product of their SCRs multiplied by the correlation coefficient - Broadly speaking, suppose you are a group Insurer with 4 entities across the globe named A,B,C and D - All four of them have SCR has $100 each. Then at Group Level your SCR is definitely less than $400 because we have to allow for diversification via correlation matrices. - Diversification occurs wherever the risks are not perfectly correlated. (Hedging would occur where they

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