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On the use of risk measures in solvency capital estimation

Author

Listed:
  • Lluís Bermúdez
  • Antoni Ferri
  • Montserrat Guillén

Abstract

Regulation on the minimum capital that a financial institution or an insurance firm must hold to guarantee its solvency is proportional to a measure of its global risk. Using Monte Carlo simulation we show that, in some instances, risk measures can substantially underestimate risk. So, we address the implications on the choice of the risk measure that determines the economic capital requirement. The paper analyses the relationship between dependence structures, risk measurement and capital estimation.

Suggested Citation

  • Lluís Bermúdez & Antoni Ferri & Montserrat Guillén, 2014. "On the use of risk measures in solvency capital estimation," International Journal of Business Continuity and Risk Management, Inderscience Enterprises Ltd, vol. 5(1), pages 4-13.
  • Handle: RePEc:ids:ijbcrm:v:5:y:2014:i:1:p:4-13
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    References listed on IDEAS

    as
    1. Belles-Sampera, Jaume & Merigó, José M. & Guillén, Montserrat & Santolino, Miguel, 2013. "The connection between distortion risk measures and ordered weighted averaging operators," Insurance: Mathematics and Economics, Elsevier, vol. 52(2), pages 411-420.
    2. Guillén, Montserrat & Sarabia, José María & Prieto, Faustino, 2013. "Simple risk measure calculations for sums of positive random variables," Insurance: Mathematics and Economics, Elsevier, vol. 53(1), pages 273-280.
    3. Bermúdez, Lluís & Ferri, Antoni & Guillén, Montserrat, 2013. "A Correlation Sensitivity Analysis of Non-Life Underwriting Risk in Solvency Capital Requirement Estimation," ASTIN Bulletin: The Journal of the International Actuarial Association, Cambridge University Press, vol. 43(01), pages 21-37, January.
    4. Antoni Ferri & Montserrat Guillén & Lluís Bermúdez, 2012. "Solvency Capital estimation and Risk Measures," Working Papers XREAP2012-02, Xarxa de Referència en Economia Aplicada (XREAP), revised Jan 2012.
    5. Philippe Artzner & Freddy Delbaen & Jean-Marc Eber & David Heath, 1999. "Coherent Measures of Risk," Mathematical Finance, Wiley Blackwell, vol. 9(3), pages 203-228.
    6. Guillen, Montserrat & Prieto, Faustino & Sarabia, José María, 2011. "Modelling losses and locating the tail with the Pareto Positive Stable distribution," Insurance: Mathematics and Economics, Elsevier, vol. 49(3), pages 454-461.
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