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Risk-Based Capital Factor Determination With Jump Risk

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  • Wenge Zhu

Abstract

Two approaches exist to set the risk-based capital (RBC) factors: the traditional probability of ruin approach and the more recently developed expected policyholder deficit approach, the latter of which has been accepted as a basis for NAIC regulatory RBC formula. For both approaches, there are examples illustrating the advantages of one over the other. The goal of this paper is to present a discussion of this issue by modeling the evolution of insurance risk as a jump-diffusion process. It is more consistent with modern financial theory to consider the issue in an intertemporal general equilibrium framework. By comparing the two approaches as applied to the jump-diffusion model, we may help clarify the ambiguity arising from using the two approaches in different examples.

Suggested Citation

  • Wenge Zhu, 2004. "Risk-Based Capital Factor Determination With Jump Risk," North American Actuarial Journal, Taylor & Francis Journals, vol. 8(2), pages 84-95.
    • Handle: RePEc:taf:uaajxx:v:8:y:2004:i:2:p:84-95
    DOI: 10.1080/10920277.2004.10596138
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