Factor risk quantification in annuity models

Uǧur Karabey, Torsten Kleinow and Andrew J.G. Cairns

Insurance: Mathematics and Economics, 2014, vol. 58, issue C, 34-45

Abstract: Calculation of risk contributions of sub-portfolios to total portfolio risk is essential for risk management in insurance companies. Thanks to risk capital allocation methods and linearity of the loss model, sub-portfolio (or position) contributions can be calculated efficiently. However, factor risk contribution theory in non-linear loss models has received little interest. Our concern is the determination of factor risk contributions to total portfolio risk where portfolio risk is a non-linear function of factor risks. We employ different approximations in order to convert the non-linear loss model into a linear one. We illustrate the theory on an annuity portfolio where the main factor risks are interest-rate risk and mortality risk.

Keywords: Risk capital allocation; Risk measures; Risk contribution; Life insurance; Hoeffding decomposition; Taylor expansion (search for similar items in EconPapers)
JEL-codes: G22 G23 (search for similar items in EconPapers)
Date: 2014
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Citations: View citations in EconPapers (2)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:insuma:v:58:y:2014:i:c:p:34-45

DOI: 10.1016/j.insmatheco.2014.06.004

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