Estimating the risk-adjusted capital is an affair in the tails

Canestraro, Davide and Dacorogna, Michel (2010): Estimating the risk-adjusted capital is an affair in the tails.

Abstract

(Re)insurance companies need to model their liabilities' portfolio to compute the risk-adjusted capital (RAC) needed to support their business. The RAC depends on both the distribution and the dependence functions that are applied among the risks in a portfolio. We investigate the impact of those assumptions on an important concept for (re)insurance industries: the diversification gain. Several copulas are considered in order to focus on the role of dependencies. To be consistent with the frameworks of both Solvency II and the Swiss Solvency Test, we deal with two risk measures: the Value-at-Risk and the expected shortfall. We highlight the behavior of different capital allocation principles according to the dependence assumptions and the choice of the risk measure.

• Item Type: MPRA Paper
• Language: English
• Keywords: Capital Allocation, Copula, Dependence, Diversification Gain, Model Uncertainty, Monte Carlo Methods, Risk-Adjusted Capital, Risk Measure
• Subjects: C - Mathematical and Quantitative Methods > C1 - Econometric and Statistical Methods and Methodology: General > C10 - General; G - Financial Economics > G1 - General Financial Markets > G11 - Portfolio Choice ; Investment Decisions; C - Mathematical and Quantitative Methods > C1 - Econometric and Statistical Methods and Methodology: General > C15 - Statistical Simulation Methods: General

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