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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

    ()
    (Departament de Matemàtica Econòmica, Financera i Actuarial. RISC-IREA. University of Barcelona. Spain)

  • Antoni Ferri

    ()
    (Departament d'Econometria, Estadística i Economia Espanyola. RISC-IREA. University of Barcelona. Spain)

  • Montserrat Guillén

    ()
    (Departament d'Econometria, Estadística i Economia Espanyola. RISC-IREA. University of Barcelona. Spain)

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.pcb.ub.edu/xreap/aplicacio/fitxers/XREAP2011-12.pdf
File Function: First version, 2011
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File URL: http://www.pcb.ub.edu/xreap/aplicacio/fitxers/XREAP2011-12.pdf
File Function: Revised version, 2011
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Bibliographic Info

Paper provided by Xarxa de Referència en Economia Aplicada (XREAP) in its series Working Papers with number XREAP2011-12.

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Length: 30 pages
Date of creation: Sep 2011
Date of revision: Sep 2011
Handle: RePEc:xrp:wpaper:xreap2011-12

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Postal: Espai de Recerca en Economia, Facultat de Ciències Econòmiques i Empresarials, Universitat de Barcelona, c/ Tinent Coronel Valenzuela, 1-11, 08034 Barcelona
Phone: +34+934039653
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Web page: http://www.pcb.ub.edu/xreap
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Keywords: Solvency II; Solvency Capital Requirement; Standard Model; Internal Model; Monte Carlo simulation; Copulas.;

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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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