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Economic Capital and the Aggregation of Risks Using Copulas
Company: University of New South Wales
Company Url: Click here to open
Year Of Publication: 2005
Month Of Publication: February
Pages: 29
Download Count: 821
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Comment Num: 0
Language: EN
Who Can Read: Free
Date: 6-12-2006
Publisher: Administrator
In this paper, weaddress the issue of the aggregation of risks using copulamodels. Copulas can be used to construct jointmultivariate distributions of the losses and provide arather flexible and realistic model of allowing for thedependence structure, while separating the effects ofpeculiar characteristics of the marginal distributionssuch as thickness of tails. This modelling structure allowsus to explore the impact of dependencies of riskson the total required economic capital. Using numericalillustrations based on Australian general insurancedata, the sensitivities of the capital requirementto the choice of the copula and other modelling as sumptions are investigated. The related issue of thediversification benefit from operating multiple businesslines in the context of aggregation of risks bycopulas is also explored. The key conclusion is thatthere is a large variation in the capital requirement aswell as diversification benefit under different copulaassumptions. The results of this paper serve as a reminderto actuaries and other industry practitionersof the significance of choosing an appropriate aggregationmodel for capital purposes.
Tang, Andrew Sign in to follow this author
Valdez, Emiliano A. Sign in to follow this author
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