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Multivariate Stress Scenarios and Solvency
Year Of Publication: 2011
Month Of Publication: February
Pages: 22
Download Count: 30
View Count: 1722
Comment Num: 0
Language: English
Source: working paper
Who Can Read: Free
Date: 2-12-2011
Publisher: Administrator
Summary
We show how the probabilistic concepts of half-space trimming and depth may be used to define convex scenario sets Q for stress testing the risk factors that affect the solvency of an insurance company over a prescribed time period. By choosing the scenario in Q which minimises net asset value at the end of the time period, we propose the idea of the least solvent likely event (LSLE) as a solution to the forward stress testing problem. The LSLE may be interpreted as a scenario causing a loss equivalent to the Value-at-Risk (VaR) at confidence level a, provided the a-quantile is a subadditive risk measure on linear combinations of the risk factors. In this case, we also show that the LSLE has an interpretation as a per-unit allocation of capital to the underlying risk factors when the overall capital is determined by VaR. We also introduce the most likely ruin event (MLRE) as a solution to the problem of reverse stress testing.
This document is published in Insurance: Mathematics and Economics (v. 50, no. 3), May 2012, 299-308.
http://dx.doi.org/10.1016/j.insmatheco.2011.12.005
Author(s)
McNeil, Alexander Sign in to follow this author
Smith, Andrew Sign in to follow this author
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