Title: On the use of risk measures in solvency capital estimation

Authors: Lluís Bermúdez; Antoni Ferri; Montserrat Guillén

Addresses: Departament de Matemàtica Econòmica, Financera i Actuarial, Riskcenter-IREA, Universitat de Barcelona, Diagonal 690, 08034 Barcelona, Spain ' ACTUARIS IBERICA, Paseo del Pintor Rosales, 44 1° Izquierda, 28008 Madrid, Spain ' Departament d'Econometria, Estadística i Economia Espanyola, Riskcenter-IREA, Universitat de Barcelona, Diagonal 690, 08034 Barcelona, Spain

Abstract: Regulation on the minimum capital that a financial institution or an insurance firm must hold to guarantee its solvency is proportional to a measure of its global risk. Using Monte Carlo simulation we show that, in some instances, risk measures can substantially underestimate risk. So, we address the implications on the choice of the risk measure that determines the economic capital requirement. The paper analyses the relationship between dependence structures, risk measurement and capital estimation.

Keywords: Solvency II; solvency capital requirements; Monte Carlo simulation; copulas; tail VAR; value-at-risk; dependence structures; risk measurement; solvency capital estimation; risk assessment.

DOI: 10.1504/IJBCRM.2014.060040

International Journal of Business Continuity and Risk Management, 2014 Vol.5 No.1, pp.4 - 13

Published online: 25 Mar 2014 *

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