Copula models of economic capital for insurance companies
The objective of this project is to construct, select, calibrate and validate a practically applicable copula internal model of economic capital for insurance companies. Copula methodology makes it possible to address multiple dependent risk factors. We identify the relevant set of asset and liability variables, and suggest a copula model for the joint distribution of these variables. Estimates of economic capital can be based on the tails of this joint distribution. Models are implemented in open source software (R and Microsoft EXCEL) and tested using simulated asset/liability data. The results are presented as a finished software product which can be utilized for customization and direct user application. The novelty of the approach consists in estimating interdependent mortality, morbidity, lapse and investment risks in one multivariate model. In particular, we address the challenges that life insurance companies face in the low interest environment. This approach requires a methodology of copula model comparison and selection and implementation of Monte Carlo simulation to the estimation of economic capital.
Society of Actuaries
Benson, S., Burroughs, R., Mohr, J., Shemyakin, A., & Zhang, H. (2020). Copula models of economic capital for life insurance companies. Society of Actuaries, Joint Risk Management Research Committee.