From deterministic to stochastic surrender risk models: impact of correlation crises on economic capital
In this paper we raise the matter of considering a stochastic modeling of the surrender rate instead of the classical S-shaped deterministic curve (in function of the spread), still used in almost all insurance companies. A stochastic model in which surrenders are conditionally independent with respect to a S-curve disturbance would be tempting in some extreme scenarii, especially to address the question of the lack of data. However, we explain why this conditional independence between policyholders, which has the advantage to be the simplest assumption, looks particularly maladaptive when the spread increases. Indeed the correlation between policyholders' decisions is most likely to increase in this situation. We suggest and develop a simple model which integrates those phenomena. With stochastic orders it is possible to compare it to the conditional independence approach qualitatively. In an partially internal Solvency II model, we quantify the impact of the correlation phenomenon on a real life portfolio for a global risk management strategy.
|Date of creation:||2011|
|Publication status:||Published in European Journal of Operational Research, Elsevier, 2011, 214 (2), pp.348-357. <10.1016/j.ejor.2011.04.038>|
|Note:||View the original document on HAL open archive server: https://hal.archives-ouvertes.fr/hal-00502847|
|Contact details of provider:|| Web page: https://hal.archives-ouvertes.fr/|
References listed on IDEAS
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- Laurent Devineau & Stéphane Loisel, 2009. "Risk aggregation in Solvency II: How to converge the approaches of the internal models and those of the standard formula?," Post-Print hal-00403662, HAL.
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