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: Faculty of Economics, University of Barcelona
Antoni Ferri: Faculty of Economics, University of Barcelona

No 201113, IREA Working Papers from University of Barcelona, Research Institute of Applied Economics

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 JEL classification:C53 (search for similar items in EconPapers)
Pages: 28 pages
Date: 2011-09, Revised 2011-09
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Citations: View citations in EconPapers (1)

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http://www.ub.edu/irea/working_papers/2011/201113.pdf (application/pdf)

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Working Paper: A correlation sensitivity analysis of non-life underwriting risk in solvency capital requirement estimation (2011)
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Persistent link: https://EconPapers.repec.org/RePEc:ira:wpaper:201113

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