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A correlation sensitivity analysis of non-life underwriting risk in solvency capital requirement estimation

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Author Info

  • Lluís Bermúdez

    ()
    (Faculty of Economics, University of Barcelona)

  • Antoni Ferri

    ()
    (Faculty of Economics, University of Barcelona)

  • Montse Guillén

    ()
    (Faculty of Economics, University of Barcelona)

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.

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File URL: http://www.ub.edu/irea/working_papers/2011/201113.pdf
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Bibliographic Info

Paper provided by University of Barcelona, Research Institute of Applied Economics in its series IREA Working Papers with number 201113.

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Length: 28 pages
Date of creation: Sep 2011
Date of revision: Sep 2011
Handle: RePEc:ira:wpaper:201113

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Postal: Tinent Coronel Valenzuela, Num 1-11 08034 Barcelona
Web page: http://www.ub.edu/irea/
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Related research

Keywords: Solvency II; Solvency Capital Requirement; Standard Model; Internal Model; Monte Carlo simulation; Copulas JEL classification:C53;

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References

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Cited by:
  1. Antoni Ferri & Lluís Bermúdez & Montserrat Guillén, 2012. "How to use the standard model with own data?," Working Papers XREAP2012-03, Xarxa de Referència en Economia Aplicada (XREAP), revised Feb 2012.

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