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The calculation of Solvency Capital Requirement using Copulas

Author

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  • Pellecchia, Marco
  • Perciaccante, Giovambattista

Abstract

Our aim is to present an alternative methodology to the standard formula imposed to the insurance regulation (the European directive knows as Solvency II) for the calculus of the capital requirements. We want to demonstrate how this formula is now obsolete and how is possible to obtain lower capital requirement through the theory of the copulas, function that are gaining increasing importance in various economic areas. A lower capital requirement involves the advantage for the various insurance companies not to have unproductive capital that can therefore be used for the production of further profits. Indeed the standard formula is adequate only with some particular assumptions, otherwise it can overestimate the capital requirements that are actually needed as the standard formula underestimates the effect of diversification.

Suggested Citation

  • Pellecchia, Marco & Perciaccante, Giovambattista, 2019. "The calculation of Solvency Capital Requirement using Copulas," MPRA Paper 94213, University Library of Munich, Germany.
    • Handle: RePEc:pra:mprapa:94213
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    File URL: https://mpra.ub.uni-muenchen.de/94213/1/MPRA_paper_94213.pdf
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    More about this item

    Keywords

    Solvency II; Solvency Capital Requirement; Standard Formula; Value-at-Risk; Copula.;
    All these keywords.

    JEL classification:

    • C13 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Estimation: General
    • C15 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Statistical Simulation Methods: General
    • C18 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Methodolical Issues: General
    • C61 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Optimization Techniques; Programming Models; Dynamic Analysis

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