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A Risk and Capital Requirement Model for Life Insurance Portfolios
Umeå University, Faculty of Science and Technology, Department of Mathematics and Mathematical Statistics.
2008 (English)Independent thesis Advanced level (degree of Master (Two Years)), 20 credits / 30 HE creditsStudent thesis
Abstract [en]

The capital requirements for insurance companies in the Solvency I framework are based on the premium and claim expenditure. This approach does not take the individual risk of the insurer into consideration and give policy holder little assur- ance. Therefore a framework called Solvency II is under development by EU and its members. The capital requirements in Solvency II are based on risk management and is related to the specific risks of the insurer. Moreover, the insurer must make disclosures both to the supervising authority and to the market. This puts pressure on the insurance companies to use better risk and capital management, which gives the policy holders better assurance.

In this thesis we present a stochastic model that describes the development of assets and liabilities. We consider the following risks: Stock market, bond market, interest rate and mortality intensity. These risks are modeled by stochastic processes that are aggregated to describe the change in the insurers Risk Bearing Capital. The capital requirement, Solvency Capital Requirement, is calculated using Conditional Value-at-Risk at a 99% confidence level and Monte Carlo simulation. The results from this model is compared to the Swiss Solvency Test model for three different types of life insurance policies. We can conclude that for large portfolios, the model presented in this thesis gives a lower solvency capital requirement than the Swiss model for all three policies. For small portfolios, the capital requirement is larger due to the stochastic mortality risk which is not included in the Swiss model. 

Place, publisher, year, edition, pages
Keyword [en]
Solvency II, Solvency Capital Requirement, life insurance.
National Category
URN: urn:nbn:se:umu:diva-51317OAI: diva2:479005
Physics, Chemistry, Mathematics
Available from: 2012-03-01 Created: 2012-01-17 Last updated: 2012-04-18Bibliographically approved

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