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A CORRELATION SENSITIVITY ANALYSIS OF NON-LIFE UNDERWRITING RISK IN SOLVENCY CAPITAL REQUIREMENT ESTIMATION

  • Lluís Bermúdez (a1), Antoni Ferri (a2) and Montserrat Guillén (a2)

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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Corresponding author

Departament de Matemàtica Econòmica, Financera i Actuarial, Riskcenter-IREA, University of Barcelona, Diagonal 690, 08034 Barcelona, Spain, Tel.: +34-93-4037043; Fax: +34-93-4021821 E-Mail: lbermudez@ub.edu

References

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