DOCUMENT DE TREBALL XREAP2011-12 A correlation sensitivity analysis of non-life underwriting risk in solvency capital requirement estimation

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.

Cite this paper

@inproceedings{RFAIREA2011DOCUMENTDT, title={DOCUMENT DE TREBALL XREAP2011-12 A correlation sensitivity analysis of non-life underwriting risk in solvency capital requirement estimation}, author={Llu{\'i}s Berm{\'u}dez RFA-IREA and Antoni Ferri RFA-IREA and Montserrat Guillen}, year={2011} }