Estimating the risk-adjusted capital is an affair in the tails

Davide Canestraro and Michel Dacorogna

MPRA Paper from University Library of Munich, Germany

Abstract: (Re)insurance companies need to model their liabilities' portfolio to compute the risk-adjusted capital (RAC) needed to support their business. The RAC depends on both the distribution and the dependence functions that are applied among the risks in a portfolio. We investigate the impact of those assumptions on an important concept for (re)insurance industries: the diversification gain. Several copulas are considered in order to focus on the role of dependencies. To be consistent with the frameworks of both Solvency II and the Swiss Solvency Test, we deal with two risk measures: the Value-at-Risk and the expected shortfall. We highlight the behavior of different capital allocation principles according to the dependence assumptions and the choice of the risk measure.

Keywords: Capital Allocation; Copula; Dependence; Diversification Gain; Model Uncertainty; Monte Carlo Methods; Risk-Adjusted Capital; Risk Measure (search for similar items in EconPapers)
JEL-codes: C10 C15 G11 (search for similar items in EconPapers)
Date: 2010-11-05
New Economics Papers: this item is included in nep-ban, nep-ias and nep-rmg
References: View complete reference list from CitEc
Citations:

Downloads: (external link)
https://mpra.ub.uni-muenchen.de/32831/1/MPRA_paper_32831.pdf original 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:pra:mprapa:32831

Access Statistics for this paper

More papers in MPRA Paper from University Library of Munich, Germany Ludwigstraße 33, D-80539 Munich, Germany. Contact information at EDIRC.
Bibliographic data for series maintained by Joachim Winter ().