An optimization approach to adaptive multi-dimensional capital management

G. A. Delsing, M. R. H. Mandjes, P. J. C. Spreij and E. M. M. Winands

Papers from arXiv.org

Abstract: Firms should keep capital to offer sufficient protection against the risks they are facing. In the insurance context methods have been developed to determine the minimum capital level required, but less so in the context of firms with multiple business lines including allocation. The individual capital reserve of each line can be represented by means of classical models, such as the conventional Cram\'{e}r-Lundberg model, but the challenge lies in soundly modelling the correlations between the business lines. We propose a simple yet versatile approach that allows for dependence by introducing a common environmental factor. We present a novel Bayesian approach to calibrate the latent environmental state distribution based on observations concerning the claim processes. The calibration approach is adjusted for an environmental factor that changes over time. The convergence of the calibration procedure towards the true environmental state is deduced. We then point out how to determine the optimal initial capital of the different business lines under specific constraints on the ruin probability of subsets of business lines. Upon combining the above findings, we have developed an easy-to-implement approach to capital risk management in a multi-dimensional insurance risk model.

Date: 2018-12
New Economics Papers: this item is included in nep-rmg
References: View references in EconPapers View complete reference list from CitEc
Citations: Track citations by RSS feed

Published in Insurance: Mathematics and Economics 84, 87-97 (2019)

Downloads: (external link)
http://arxiv.org/pdf/1812.08435 Latest version (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:arx:papers:1812.08435

Access Statistics for this paper

More papers in Papers from arXiv.org
Bibliographic data for series maintained by arXiv administrators ().