Estimating the risk-adjusted capital is an affair in the tails
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.
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Bibliographic InfoPaper provided by University Library of Munich, Germany in its series MPRA Paper with number 32831.
Date of creation: 05 Nov 2010
Date of revision:
Capital Allocation; Copula; Dependence; Diversification Gain; Model Uncertainty; Monte Carlo Methods; Risk-Adjusted Capital; Risk Measure;
Find related papers by JEL classification:
- C10 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - General
- G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
- C15 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Statistical Simulation Methods: General
This paper has been announced in the following NEP Reports:
- NEP-ALL-2011-08-22 (All new papers)
- NEP-BAN-2011-08-22 (Banking)
- NEP-IAS-2011-08-22 (Insurance Economics)
- NEP-RMG-2011-08-22 (Risk Management)
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