Risk aggregation in non-life insurance: Standard models vs. internal models
Journal
Insurance: Mathematics and Economics
ISSN
0167-6687
Type
journal article
Date Issued
2020-11
Author(s)
Abstract
Standard models for capital requirements restrict the correlation between different risk factors to the linear measure and do not consider undertaking-specific parameters. We propose a comprehensive framework for risk aggregation in non-life insurance using copulas and two levels of aggregation: base-level aggregation (different assets, different lines of insurance) and top-level aggregation (assets and liabilities). Using empirical data from Korean and German insurance companies, we compare our internal risk model with three regulatory standard models (Korean RBC, Solvency II, Swiss Solvency Test). We show that the standard models significantly overestimate the potential risk size for the insurers considered in this study by 61.2% and 57.8% on average for the Korean and the German cases respectively, where almost half of the overestimation level results from the uniform risk profile imposed by regulations and the other half comes from the linear correlation assumption. The differences between standard models and internal models might distort competition when both approaches are used in one market.
Language
English
Keywords
Insurance regulation
Risk aggregation
Vine copula
Capital requirements
HSG Classification
contribution to scientific community
HSG Profile Area
SOF - System-wide Risk in the Financial System
Refereed
yes
Publisher
North Holland Publ. Co.
Volume
95
Start page
183
End page
193
Subject(s)
Division(s)
References
http://s1.goeshow.com/aria/annual/2018/conference_program_sessions.cfm
Eprints ID
255596
File(s)![Thumbnail Image]()
open.access
Name
Eling Jung Risk Aggregation_ARIA2018.pdf
Size
744.19 KB
Format
Adobe PDF
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