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A CORRELATION SENSITIVITY ANALYSIS OF NON-LIFE UNDERWRITING RISK IN SOLVENCY CAPITAL REQUIREMENT ESTIMATION

Published online by Cambridge University Press:  29 April 2013

Lluís Bermúdez ,
Antoni Ferri  and
Montserrat Guillén
Lluís Bermúdez*
Affiliation:
Departament de Matemàtica Econòmica, Financera i Actuarial, Riskcenter-IREA, University of Barcelona, Diagonal 690, 08034 Barcelona, Spain
Antoni Ferri
Affiliation:
Departament d'Econometria, Estadistíca i Economia Espanyola, Riskcenter-IREA, University of Barcelona, Diagonal 690, 08034 Barcelona, Spain
Montserrat Guillén
Affiliation:
Departament d'Econometria, Estadistíca i Economia Espanyola, Riskcenter-IREA, University of Barcelona, Diagonal 690, 08034 Barcelona, Spain
*
Departament de Matemàtica Econòmica, Financera i Actuarial, Riskcenter-IREA, University of Barcelona, Diagonal 690, 08034 Barcelona, Spain, Tel.: +34-93-4037043; Fax: +34-93-4021821 E-Mail: [email protected]
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Abstract

This paper analyses the impact of using different correlation assumptions between lines of business when estimating the risk-based capital reserve, the solvency capital requirement (SCR), under Solvency II regulations. A case study is presented and the SCR is calculated according to the standard model approach. Alternatively, the requirement is then calculated using an internal model based on a Monte Carlo simulation of the net underwriting result at a one-year horizon, with copulas being used to model the dependence between lines of business. To address the impact of these model assumptions on the SCR, we conduct a sensitivity analysis. We examine changes in the correlation matrix between lines of business and address the choice of copulas. Drawing on aggregate historical data from the Spanish non-life insurance market between 2000 and 2009, we conclude that modifications of the correlation and dependence assumptions have a significant impact on SCR estimation.

Keywords

Solvency IIsolvency capital requirementstandard modelinternal modelMonte Carlo simulationcopulas
Type
Research Article
Information
ASTIN Bulletin: The Journal of the IAA , Volume 43 , Issue 1 , January 2013 , pp. 21 - 37
Copyright
Copyright © ASTIN Bulletin 2013

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