A correlation sensitivity analysis of non-life underwriting risk in solvency capital requirement estimation

Lluís Bermúdez (), Antoni Ferri () and Montserrat Guillen
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Lluís Bermúdez: Departament de Matemàtica Econòmica, Financera i Actuarial. RISC-IREA. University of Barcelona. Spain
Antoni Ferri: Departament d'Econometria, Estadística i Economia Espanyola. RISC-IREA. University of Barcelona. Spain

No XREAP2011-12, Working Papers from Xarxa de Referència en Economia Aplicada (XREAP)

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 II; Solvency Capital Requirement; Standard Model; Internal Model; Monte Carlo simulation; Copulas. (search for similar items in EconPapers)
Pages: 30 pages
Date: 2011-09, Revised 2011-09
New Economics Papers: this item is included in nep-cmp and nep-rmg
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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http://www.xreap.cat/RePEc/xrp/pdf/XREAP2011-12.pdf First version, 2011 (application/pdf)
http://www.xreap.cat/RePEc/xrp/pdf/XREAP2011-12.pdf Revised version, 2011 (application/pdf)

Related works:
Working Paper: A correlation sensitivity analysis of non-life underwriting risk in solvency capital requirement estimation (2011)
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