Economic capital: a plea for the Student copula

Marc Bagarry, France

The aim of this article is to determine the capital a non-life insurance company must have to limit ruin risk in the future. This amount is determined by the probability distributions of future results. We estimate these distributions by Monte Carlo simulations of components of result. A particularly important element is to well reproduce the occurrence of claims in each line of business as well as simultaneous occurrences in several lines of business (e.g., because of a catastrophe). We model the stochastic dependence structure between lines of business by a copula. Data analysis shows that many LOBs are correlated. This directs our choice of a type of parametric copula. In dimension n, elliptical copulas are more adequate than the often used archimedean copulas. Within the family of elliptical copulas, the student copula provides a better modeling of the occurrence of extreme events in several LOBs. The analysis provides a prudent and realistic estimation of the company economic capital.
Date: 29 May - Time: 16:30 to 18:00 - Room: 251
Theme: 1.A. Stochastic dependence