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Why using a general model in Solvency II is not a good idea : an explanation from a Bayesian point of view

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Author Info

  • Irene Albarrán

    ()

  • J. Miguel Marín

    ()

  • Pablo J. Alonso

    ()

Abstract

The passing of Directive 2009/138/CE (Solvency II) has opened a new era in the European insurance market. According to this new regulatory environment, the volume of own resources will be determined depending on the risks that any insurer would be holding. So, nowadays, the model to estimate the amount of economic capital is one of the most important elements. The Directive establishes that the European entities can use a general model to perform these tasks. However, this situation is far from being optimal because the calibration of the general model has been made using figures that reflects and average behaviour. This paper shows that not all the companies operating in a specific market has the same risk profile. For this reason, it is unsatisfactory to use a general model for all of them. We use the PAM clustering method and afterwards some Bayesian tools to check the results previously obtained. Analysed data (public information belonging to Spanish insurance companies about balance sheets and income statements from 1998 to 2007) comes from the DGSFP (Spanish insurance regulator).

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Bibliographic Info

Paper provided by Universidad Carlos III, Departamento de Estadística y Econometría in its series Statistics and Econometrics Working Papers with number ws113729.

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Date of creation: Nov 2011
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Handle: RePEc:cte:wsrepe:ws113729

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Keywords: Solvency II; PAM; Longitudinal multinomial model;

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References

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  1. J. David Cummins & Mary A. Weiss, 1991. "The structure, conduct, and regulation of the property-liability insurance industry," Conference Series ; [Proceedings], Federal Reserve Bank of Boston, vol. 35, pages 117-164.
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Cited by:
  1. Eling, Martin & Pankoke, David, 2013. "Basis Risk, Procylicality, and Systemic Risk in the Solvency II Equity Risk Module," Working Papers on Finance 1306, University of St. Gallen, School of Finance.

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