Diversification credit

{
  "id": "MLC-T-INS-001201",
  "term": "Diversification credit",
  "field": "Insurance and risk management",
  "definition": "A calculated reduction in the total required economic or regulatory capital that reflects the benefit of holding a portfolio of risks that are not perfectly correlated. Because different types of risk (such as underwriting, market, and credit risk) are unlikely to produce maximum losses simultaneously, the capital needed for the combined portfolio is less than the sum of the capital required for each risk in isolation. Regulatory frameworks like Solvency II use a correlation matrix to quantify this effect when determining an insurer's Solvency Capital Requirement.",
  "url": "https://mlchart.com/terminology/insurance/diversification-credit/"
}