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Replicating Portfolio Approach to Capital Calculation

Author

Listed:
  • Mathieu Cambou

    (Ecole Polytechnique Fédérale de Lausanne)

  • Damir Filipović

    (Ecole Polytechnique Fédérale de Lausanne; Ecole Polytechnique Fédérale de Lausanne - Swiss Finance Institute)

Abstract

The replicating portfolio (RP) approach to the calculation of capital for life insurance portfolios is an industry standard. The RP is obtained from projecting the terminal loss of discounted asset liability cash flows on a set of factors generated by a family of financial instruments that can be efficiently simulated. We provide the mathematical foundations and a novel dynamic and path-dependent RP approach for real-world and risk-neutral sampling. We show that the RP approach yields asymptotically consistent capital estimators. We illustrate the tractability of the RP approach by two numerical examples.

Suggested Citation

  • Mathieu Cambou & Damir Filipović, 2016. "Replicating Portfolio Approach to Capital Calculation," Swiss Finance Institute Research Paper Series 16-25, Swiss Finance Institute.
    • Handle: RePEc:chf:rpseri:rp1625
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    Keywords

    asset-liability portfolio; chaos expansion; replicating portfolio; solvency capital;
    All these keywords.

    JEL classification:

    • C61 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Optimization Techniques; Programming Models; Dynamic Analysis
    • C63 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Computational Techniques
    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
    • G22 - Financial Economics - - Financial Institutions and Services - - - Insurance; Insurance Companies; Actuarial Studies

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