Work

A Correlation Sensitivity Analysis of Non-life Underwriting Risk in Solvency Capital Requirement Estimation

Year: 2011

Type: article

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.

Source: Astin Bulletin

DOI: 10.1017/asb.2012.1

Authors: Lluís Bermúdez, Antoni Ferri, Montserrat Guillén

Institution: Universitat de Barcelona

Language: English

Topic: Insurance and Financial Risk Management

Subfield: Economics and Econometrics

Field: Economics, Econometrics and Finance

Domain: Social Sciences

Open Access status: bronze

Funder: Institució Catalana de Recerca i Estudis Avançats

OpenAlex ID: W3125149485