Copula

The Economic Capital Estimation of

Property and Casualty Insurance
Companies - An Application of Copula

Copula

No Pain, No Gain!

i
e-Thesys (98 )

Copula

(risk-based capital, RBC)

copula
(Capital at Risk)

(Solvency
II)

copula
ii
e-Thesys (98 )

Copula

Abstract

The function of insurance industry is to ensure economic security against risk.

Therefore, to keep a sound solvency is always the primary topic of financial
supervisory committees and insurance companies.

The current capital standard

under the risk-based capital (RBC) approach can neither reflect the real risks faced by
property and casualty insurance companies (P & C insurance companies), nor take
into account the effect of correlation structure among the risk factors. In order to
realize the effect of correlation structure on capital adequacy, this study applies
different types of copulas and Capital at Risk to estimate the required economic
capitals of P & C insurance companies under varied confidence levels. The results
show that there exists great and nonlinear tail correlation among risks of P & C
insurance companies.

Moreover, if the internal model-based approach which

Solvency II advocates is used, the capital requirements calculated under this method
will be lower than the capitals required under the prevalent RBC approach.

It

represents the current capital supervision used in Taiwan may be too conservative for
capital requirements of P & C companies.

Keywords: Property and casualty insurance company, Risk factor, Correlation

structure, Copula, Economic capital
iii
e-Thesys (98 )

Copula

........................................................................................................... 1
................................................................................ 1
........................................................................................... 4
................................................................................................... 5
..................................................... 5
Copula ...................................................13
..................................................................................................15

......................................................................................15

Copula ......................................................................................16

...................................................................21

..................................................................................................24
...................................................................................24
..........................................................................................25
...............................................................................28
..........................................................................................31
..............................................................................................34
..........................................................................................34
...................................................................................35
.................................................................................................................37
...............................................................42
...........................................................43
...............................................................44
...........................................................45
iv
e-Thesys (98 )

Copula

1.1 ..................................................................................................... 4
3.1 ( K =Gaussian) ......................................................16
3.2 Frchet-Hoeffding copula ...............................................................18

2.1 1968 1998 ............................. 6

2.2 ..................................................10
4.1 ................................................................................................24
4.1 ()..........................................................................................25
4.2 .............................................................25
4.2 () .......................................................26
4.3 ........................................................................................27
4.4 .......................29
4.5 ..................................30
4.5 () ............................31
4.6 ........................................................................................33

v
e-Thesys (98 )

Copula

( 1997 2000
2007 )( 2001 911 2005
2009 )

()
1

1976
2
1992

20 3

(
2002Klein 1995) 2003
1

2
3

2005 11
18 09402526590
2009 1 17
09802500572
1976 7 17 17862
1992 9 23 811764493

1
e-Thesys (98 )

Copula

(risk-based capital, RBC)

4

Klein (1995)

(Cummins, Harrington, and Niehaus 1995)

(2000) Saunders and Cornett (2006)

(nonlinear dependencies)
Eling and Toplek (2009)(lower-capitalized)
(well-capitalized)(ruin
probability)

(Value at Risk, VaR)(

2001 2001 2001 2007)
(Basel II)(Solvency II)
5

(RBC ratio)
200%
Basel II (internal model-based
approach)(advanced measurement approach) 2010
2
e-Thesys (98 )

Copula

J. P. Morgan 1994

(Capital at Risk)

- (variance-covariance method delta-normal

method)(historical simulation method)(monte carlo
simulation method)(extreme value theory) 6
-
(fat-tailed)

(model risk)

(copula)

copula

Solvency II (solvency capital requirement, SCR)

Jorion (2007)
3
e-Thesys (98 )

Copula

copula

(RBC ratio)

Copula

Gaussian copula

Students t

Clayton copula

1.1

4
e-Thesys (98 )

Copula

1990
(initial minimum net worth requirement)(continuing net worth
minimum requirement) 1992 20
1997

1970

5
e-Thesys (98 )

Copula

1980

8 2.1
9
10

( 2003)

11

2.1

1968 1998

143

22%

86
36
40
22
26
28
44
44
169

13%
6%
6%
3%
4%
4%
7%
7%
26%

638

100%

Swiss Re (2000)

1968 1998 2.1

/
10
Berger, Herring, and Szeg (1995)(regulatory capital)

11
2001 7 9 9000134140

2007 7 18 09600091711
2008 1 9 09602551847
6
e-Thesys (98 )
9

Copula

(Basel Accord)(risk-weighted assets)1974

(Bank for International Settlements, BIS)
(Basel Committee on Banking Supervision,
BCBS) 1988 (Basel I)
8%

1996 2004

(National Association of Insurance

Commissioners, NAIC) 1990
1993
1993
12
(1)
(2)
(3)(4)
( 2001Swiss Re 2000)

12

2008 4 24 09702502031

7
e-Thesys (98 )

Copula

()

1.

(off-balance sheet risk, C 0 )

2.

(asset risk, C1 )

3.

(insurance risk, C 2 )

4.

(interest rate risk, C 3 )

5.

(business risk, C 4 )
(
)()(
)()(
)

13
(authorized control level RBC, RBC ACL )
( 2001Kopcke 1996)14

13

14

(2001)C1 C 3 C 2
C 0 C 4

8
e-Thesys (98 )

Copula

RBC ACL _ LIFE = [C 0 + C 4 + (C1 + C 3) 2 + C 2 2 ] 50%

(1)

()

1.

(off-balance sheet risk, R0 )

2.

(fixed income asset risk, R1 )

3.

(Equity asset risk, R 2 )

4.

(credit risk, R3 )

5.

(reserving risk, R 4 )

6.

(net premium written risk, R5 )

R1 R5
R 0
15

15

9
e-Thesys (98 )

Copula

RBC ACL _ P&C = [ R 0 + ( R1) 2 + ( R 2) 2 + ( R3) 2 + ( R 4) 2 + ( R5) 2 ] 50%

(2)

()

(total adjusted capital, TAC )

16(3)
2.2

RBC ratio =

(TAC )
( RBC ACL )

(3)

2.2

RBC ratio

200%

200% 150%

150% 100%

100% 70%

70%

(No Action Level)

(Company Action Level)

(Regulatory Action Level)

(Authorized Control Level)

(Mandatory Control Level)

200% 250%
(trend test)

RBC

()

16

10
e-Thesys (98 )

Copula

1.

Meister
(1998)

(Grace, Harrington, and Klein 1998)

2.

Cummins, Harrington, and Klein (1995)

Grace, Harrington, and Klein (1998) Cummins, Grace, and Phillips (1999)
1989 1991
50%
(financial analysis insolvency tracking, FAST)17

17

11
e-Thesys (98 )

Copula

3.

Beder (1995) Dowd

(1998)

(1994)

4.

( 1998Cummins, Harrington,
and Niehaus 1993Shepheard-Walwyn and Litterman 1998OConnor,
Golden, and Reck 1999)

12
e-Thesys (98 )

Copula

Jorion (1996)Meister (1998)Ahlgrim (1999)Mckeet (1999)Panning (1999)

Coronado (2000)

2010

copula

Copula
(linear dependencies)

Jouanin, Riboulet, and Roncalli (2004) copula

copula
(parametric VaR
Gaussian VaR) 95%

Rosenberg
and Schuermann (2006) 1994 2002 17
copula
(expected shortfall)
(business mix)copula

13
e-Thesys (98 )

Copula

Tang and Valdez (2009) 1992 2002

copula copula

copula
Prescribed 18
(short tail)(long tail)
Prescribed
(one size fits all)
He and Gong (2009)
(hazard rate)19(bottom-up)
20 copula
(Conditional Value at Risk, CVaR)

18

19

20

APRA(Australian Prudential Regulation Authority)

GPS-113 (APRA 2002)
GPS-110 (APRA 2009) Prescribed
He and Gong (2009) Clemente and Romano (2004)

copula (top-down)
copula

(Cech 2006)
14
e-Thesys (98 )

Copula

(kernel smoothing method)

copula

copula

(kernel function, K )
(bandwidth, h ) [ x1 , x2 , K , xn ]
f K h
(4) 3.1

f ( x, h ) =

1 n x xi

K
nh i =1 h

(4)

UniformGaussianTriangularBiweight Epanechnikov

(scaling factor)21
(cumulative destiny function, CDF)

Matlab Gaussian 100

21

Bowman and Azzalini (1997)

15
e-Thesys (98 )

Copula

xi
3.1 ( K =Gaussian)

Copula
copula
copula n
n (uniform distribution)
n U (0, 1) (5)

F1 ( x1 ) ~ U (0, 1), ..., Fn ( xn ) ~ U (0, 1)

(5)

Sklar (sklar 1959) n F ( x1 , x2 , K, xn )

n copula C

F ( x1 , x2 , K, xn ) = C [F1 ( x1 ), F2 ( x2 ), K , Fn ( xn )]

(6)

copula C

1.

C : [0, 1] [0, 1]

2.

3.

C Ci

Ci (u ) = C (1, K ,1, u ,1, K ,1) = ufori [1, K , n]u [0,1]

16
e-Thesys (98 )

Copula

(continuous distributions)
copula (7)(strictly
increasing transformations)copula (invariance property)

C (u1 , K , u n ) = F F11 ( x1 ), K , Fn1 ( xn )

(7)

copula
copula

(antimonotone function) copula

copula(minimum copula)
copula(antimonotone copula)(8) 3.2 (a)
(comonotone function)
copula copula(maximum copula)
copula(9) 3.2 (c)(8)(9)
Frchet-Hoeffding copula (Frchet-Hoeffding copula boundaries)(10)
W (ui ) copula
M (ui )

W (ui ) = max(u1 + u 2 1, 0)

(8)

M (ui ) = min(ui ) for i = 1, 2, K , n and n R

W (ui ) C (ui ) M (ui ) for n 2

(9)

(10)

17
e-Thesys (98 )

Copula

(b) Independence copula

u1

u1

u2

(c) Maximum copula (M)

C(u1, u2)

C(u1, u2)

C(u1, u2)

(a) Minimum copula (W)

u2

u1

u2

3.2 Frchet-Hoeffding copula

copula Archimedean copulas Elliptical copulas 22

Archimedean Copulas
Archimedean copulas
(closed-form solutions) copula
Archimedean copulas

C (u1 , u 2 , K , u n ) = 1[ (u1 ) + (u 2 ) + K + (u n )]

(11)

0 u1 , u2 , K , u n 1 (generator)

(i) (1) = 0
(ii) For all u (0, 1), ' (u) < 0 and '' (u) 0
(iii) 1 [0, ) (completely monotonic function)

Archimedean copulas

1. Gumbel copula

22

Copula McNeil, Frey, and Embrechts (2005)

18
e-Thesys (98 )

Copula

Gumbel copula copula

1/
n

C (u1 , u 2 , K , u n ) = exp (ln ui ) with > 1
i=1

(12)

(u ) = ( ln(u )) 1 (t ) = exp( t 1/ )
> 1 Gumbel copula

2. Frank copula
Frank copula copula

C (u1 , u2 , K , un ) =

1 in=1 (e ui 1)
ln 1 +
with > 0 when n 3

(e 1) n1

(13)

(u ) = log(e au 1 e 1) 1 (t ) = (1 ) ln[1 + e t (e 1)]

> 0 Frank copula

3. Clayton copula

Gumbel copula Clayton copula

copula Clayton copula

C (u1 , u 2 , K , u n ) = ui n + 1
i=1

1 /

(u ) = u 1 1 (t ) = (t + 1)

1 /

with > 0

(14)

> 0 Clayton copula

19
e-Thesys (98 )

Copula

Elliptical Copulas
Elliptical copulas (elliptical distributions) copula

Students t copulas

1. Gaussian copula

Gaussian copula

C (u1 , u 2 , K , u n ) = R ( 1 (u1 ), 1 (u 2 ), K , 1 (u n ))

R (x1 , x 2 , K , xn ) =

xn

xn 1

x1

exp 0.5 z T R 1 z

(2 )n

(15)

| R |dz1dz 2 K dz n

(16)

R (ui )
1 (ui ) R
Gaussian copula

2. Students t copula

Students t copula

C (u1 , u 2 , K , u n ) = t R , (t1 (u1 ), t-1 (u 2 ), K , t1 (u n ))

t R , ( x1 , K , xn ) =

+ n

( 2 )( )

n/2

xn

xn 1

x1
1

K 1 + z T R 1 z

(17)

( + n ) / 2

dz1 K dz n (18)

20
e-Thesys (98 )

Copula

t R , Students t t (ui )
Students t t1 (ui ) R

Gaussian copulaStudents t copula

1 copula Cauchy copula

Students t Students t copula Archimedean
copulas

( 2001)
(selection of risk)
(insolvency)23

(underwriting
risk)

(investment risk)
(over collateralization)

23

(1997) (2003) Kenney (1967)

(Insurance Regulatory Information System, IRIS)

21
e-Thesys (98 )

Copula

()
(expense risk)

Gaussian copula Students t copula

Clayton copula (down-tail)

(downside risk)

CML (canonical maximum likelihood, CML)

Gaussian copula Students t copula 24

24

CML IFM (inference functions for margins, IFM)

(maximum likelihood estimation, MLE) copula
CML IFM Cherubini, Luciano, and
Vecchiato (2004)
22
e-Thesys (98 )

Copula

(monte carlo approach)

99%99.5%
99.9%

23
e-Thesys (98 )

Copula

(net loss ratio, NLR)

(net return on investment, NRI)

(expense ratio, ER)

Clayton copula
Clayton copula

(underwriting profit ratio, UP)

4.1

4.1

+
+

++

/
24
e-Thesys (98 )

Copula

4.1 ()

+(/)
1
+ ++
++_

_
++
/[( +
)/2]
+++
/

1.

2.

2009

(Taiwan Economic Journal Database)

2009
1999 1999
(missing data)
4.2
4.3
4.2

NLR

NRI

ER

UP

2816
2817

199103
199203

200909
200909

75
71

75
71

75
71

75
71

25
e-Thesys (98 )

Copula

4.2 ()

NLR

NRI

ER

UP

2819
2832
2848
2850
2852

199403
199703
199803
199903
199903

200909
200909
200909
200909
200909

63
51
47
42
42

63
51
47
43
43

63
51
47
42
41

63
51
47
42
41

49.58% 56.74%
33.29% 50.54%-5.04% 13.34%
4.21% 12.42%
2.64% 9.5% 2.4% 15.27%
3.27% 16.51%
4.22% 8.47%

2007 1999 70%

1994 30% 20%

40%

26
e-Thesys (98 )

Copula

4.3
Panel ANLR

75
0.5154
0.0688
1.7896
6.4039
0.3987
0.5096
0.8355

71
0.4996
0.0296
-0.8497
0.8744
0.4013
0.5064
0.5621

63
0.5674
0.0950
-0.1546
0.9215
0.3131
0.5681
0.8052

51
0.5267
0.0610
0.7937
0.8967
0.4166
0.5193
0.6891

47
0.4958
0.0400
0.0923
-0.0878
0.4176
0.4967
0.6040

42
0.5507
0.0264
-0.1238
0.7679
0.4826
0.5506
0.6193

42
0.5424
0.0416
2.0663
8.4102
0.4643
0.5401
0.7264

71
0.4344
0.0343
0.2223
-0.3587
0.3712
0.4357
0.5075

63
0.4126
0.0720
-1.6287
2.1768
0.1631
0.4348
0.4975

51
0.3329
0.1527
0.0270
-1.4765
0.1320
0.3941
0.5929

47
0.4771
0.0309
-0.5441
0.5738
0.3814
0.4791
0.5275

42
0.4127
0.0240
-0.1701
-0.0966
0.3572
0.4143
0.4605

41
0.4429
0.0307
0.1358
-0.9881
0.3866
0.4377
0.5003

71
0.0408
0.0371
-0.5996
0.3758
-0.0665
0.0456
0.1078

63
0.0045
0.1017
2.6063
9.8036
-0.1612
-0.0089
0.4640

51
0.1334
0.1651
-0.0995
-0.9073
-0.2899
0.0839
0.3899

47
0.0085
0.0456
-1.2081
4.5136
-0.1734
0.0143
0.1050

42
0.0063
0.0327
-0.6922
-0.2657
-0.0690
0.0113
0.0591

41
0.0041
0.0372
0.5517
-0.2893
-0.0549
0.0015
0.0940

63
0.1242
0.0847
0.5538
-0.5751
-0.0052
0.1124
0.3328

51
0.0814
0.0569
0.7653
1.1900
-0.0283
0.0741
0.2658

47
0.0575
0.0596
-0.2311
2.7433
-0.1281
0.0560
0.2422

43
0.0421
0.0489
1.1943
2.7149
-0.0537
0.0358
0.2086

43
0.0612
0.0561
1.0948
2.6234
-0.0271
0.0542
0.2650

Panel BER

75
0.5054
0.0522
-0.2210
0.3359
0.3670
0.5124
0.6460

Panel CUP

75
-0.0504
0.0627
-1.1931
1.6191
-0.2630
-0.0381
0.0409

Panel DNRI

75
0.0652
0.0422
0.6596
-0.3132
-0.0052
0.0557
0.1797

71
0.0730
0.0608
1.4096
1.3872
0.0067
0.0537
0.2582

27
e-Thesys (98 )

Copula

Gaussian copula
99%99.5% 99.9%

Students t copula
99%99.5% 99.9%
4.4
()()

4.4 Students t copula

Gaussian copula

Gaussian copula Students t copula

99%

1%
99.9%
99.9%

99.9%
200%

Gaussian Students t copulas

28
e-Thesys (98 )

Copula

4.4

Copulas

RBC ratio

99.5%

99.9%

3,149,217

3,938,671

5,111,287

3,045,829

3,874,460

5,392,847

-3.2830%

-1.6303%

5.5086%

489,548

1,172,515

2,519,819

685,022

1,374,208

2,922,512

Difference

39.9294%

17.2017%

15.9810%

Gaussian

1,334,921

1,622,543

2,259,789

1,349,720

1,683,050

2,496,778

Difference

1.1086%

3.7291%

10.4872%

Gaussian

777,186

1,042,879

1,691,231

819,543

1,074,789

1,800,562

Difference

5.4501%

3.0597%

6.4646%

Gaussian

907,304

1,078,125

1,436,735

925,818

1,103,713

1,473,997

Difference

2.0405%

2.3734%

2.5935%

Gaussian
Students t
Difference

740,730
778,074
5.0416%

928,305
963,974
3.8424%

1,275,817
1,355,919
6.2785%

472,811

583,266

847,417

470,474

612,767

894,001

-0.4944%

5.0580%

5.4972%

Gaussian

Students t

1,601,336

4,050,062

200%-300%

Difference
Gaussian

Students t

Students t

Students t

Students t

22,325,133

4,808,926

4,980,818

2,090,308

5,311,525

33,748,593

6,834,398

7,457,529

5,346,006

10,164,868

> 300%

> 300%

> 300%

> 300%

> 300%

Gaussian

Students t

3,830,959

6,952,194

Difference
1.
2.
3.
4.

> 300%

99%

(TWD)
Difference[(Students copula Gaussian copula )/Gaussian copula ]100%

Gaussian copula
Students t copula

Clayton copula
Clayton copula

29
e-Thesys (98 )

Copula

99%99.5% 99.9%
4.5
4.4 4.5 Gaussian copula Students t copula
4.5 4.4
4.5 4.4

4.5 Clayton
copula Gaussian copula Students t copula

Clayton
copula

99% Gaussian copula Students t copula

Clayton copula
copula
99.9%

99.9%

Copulas
Gaussian
Students t
Clayton
Difference 1
Difference 2
Gaussian
Students t
Clayton
Difference 1
Difference 2

4.5
RBC ratio
99%
99.5%
99.9%
1,542,605 1,675,757 1,884,306
1,483,894 1,647,500 2,077,255
1,601,336
4,050,062 200%-300% 1,841,925 1,995,398 2,256,434
-3.8060% -1.6862% 10.2398%
19.4036% 19.0745% 19.7488%
-615,425
-278,141
610,501
-545,615
-101,987
790,520
> 300%
1,173,410 1,726,944 2,975,504
22,325,133
33,748,593
11.3435% 63.3328% 29.4870%
290.6666% 720.8880% 387.3871%
30
e-Thesys (98 )

Copula

4.5 ()
Copulas RBC ratio
99%
99.5%
99.9%
Gaussian
650,681
748,634
967,807
Students t
705,923
850,711 1,155,953
> 300%
Clayton
766,722
881,243 1,099,500
4,808,926
6,834,398
Difference 1
8.4898% 13.6351% 19.4405%
Difference 2
17.8338% 17.7135% 13.6074%
Gaussian
211,825
345,376
677,573
Students t
258,723
468,228
860,148
> 300%
Clayton
943,205 1,167,056 1,678,177
4,980,818
7,457,529
Difference 1
22.1400% 35.5704% 26.9455%
Difference 2
345.2752% 237.9088% 147.6748%
Gaussian
876,059 1,004,700 1,307,058
Students t
912,236 1,077,437 1,486,616
> 300%
Clayton
1,123,398 1,437,031 1,902,209
2,090,308
5,346,006
Difference 1
4.1295%
7.2396% 13.7375%
Difference 2
28.2331% 43.0308% 45.5336%
Gaussian
679,289
792,988 1,038,203
Students t
705,839
852,288 1,199,253
> 300%
Clayton
1,337,486 1,561,428 1,949,255
10,164,868
5,311,525
Difference 1
3.9086%
7.4782% 15.5124%
Difference 2
96.8952% 96.9045% 87.7527%
Gaussian
417,350
516,552
668,537
Students t
458,502
549,132
805,644
> 300%
Clayton
723,885
826,486 1,093,316
3,830,959
6,952,194
Difference 1
9.8602%
6.3071% 20.5085%
Difference 2
73.4478% 60.0004% 63.5386%

1. (TWD)
2. Difference1[(Student's copula Gaussian copula )/Gaussian copula ]100%
3. Difference2[(Clayton copula Gaussian copula )/Gaussian copula ]100%

(backtesting)
Kupiec
(1995)

31
e-Thesys (98 )

Copula

(log-likelihood ratio, LR )(19)

{[

LR = 2 ln (1 p )T N p N + 2 ln 1 ( N / T )T N ( N / T )

}~

2
1

(1)

(19)

T N p LR

12 (1) ( H 0 : p = ) 1
Kupiec (1995)

copula
Kupiec
copula
copula 4.6
4.6 copula
LR

4.4 4.5
99.9%

32
e-Thesys (98 )

Copula

4.6
Panel A 99%

Gaussian_VaR
T_VaR

0
0
0

0
0
0

0
0
0

0
0
0

0
0
0

0
1
1

0
0
0

0
1
1

0
0.0026
0.0026
LR
3.0400
3.0400
2
6.6349
6.6349
6.6349
99% (1)
Kupiec
N
Panel B 99.5%

0
0
0

0
0
0

0
0
0

0
0
0

0
0
0

0
0
0

0
0
0

0
0
0

0
0
0
LR
2
99.5% (1)
7.8794
7.8794
7.8794
Kupiec
N
Panel C 99.9%

0
0
0

0
0
0

0
0
0

0
0
0

0
0
0

0
0
0

0
0
0

0
0
0

0
0
0
LR
2
99.9% (1)
10.8276
10.8276
10.8276
Kupiec
N

Gaussian_VaR
T_VaR
Clayton_VaR
2
2
1
0
0
0
1
1
1
0
0
0
0
0
0
1
1
0
0
0
0
4
4
2
0.0104
0.0104
0.0052
0.0051
0.0051
1.0990
6.6349
6.6349
6.6349
< 9
2
0
1
0
0
0
0
3
0.0078
0.5095
7.8794
< 6

2
0
0
0
0
0
0
2
0.0052
0.0025
7.8794

1
0
0
0
0
0
0
1
0.0026
0.5472
7.8794

1
0
0
0
0
0
0
1
0.0026
0.6768
10.8276
< 3

1
0
0
0
0
0
0
1
0.0026
0.6768
10.8276

0
0
0
0
0
0
0
0
0
10.8276

33
e-Thesys (98 )

Copula

1976
1992
20 2003

(capital requirement)

Gaussian copula
Students t copula Clayton copula

Students t copula Gaussian copula

Clayton copula
Gaussian copula Students t copula

34
e-Thesys (98 )

Copula

Gaussian copula
Students t copula 99%

99.9% Clayton copula

99%
copula

2003

copula

35
e-Thesys (98 )

Copula

1.

2.

3.

36
e-Thesys (98 )

Copula

[1] 2001

[2] 1997 47

50-63
[3] 2001

[4] 2006

(http://www.tii.org.tw/fcontent/information/information01.asp)
[5] 2001

64 85-108
[6] 2003

109-125
[7] 1998

107-131
[8] 2007

20
[9] 2001-

[10] 2001(VaR)

(RBC) 31 90-99
[11] 2002

18 2 113-130
37
e-Thesys (98 )

Copula

[12] 2000-

[13] 1994 NAIC

[1] Ahlgrim, K. C. 1999. Investigating the use of value at risk in insurance. Working
paper, University of Illinois at Urbana-Champaign, Department of Finance.
[2] Australian Prudential Regulation Authority (APRA). 2002. Prudential Standard
GPS 110: Capital Adequacy for General Insurers.
( http://www.apra.gov.au/General/upload/GPS-110-Capital-Adequacy-for-Genera
l-Insurers.pdf)
[3] Australian Prudential Regulation Authority (APRA). 2009. Prudential Practice
Guide: GPG 113General Insurance Internal Model-based Method for
Determining Minimum Capital Requirement.
( http://www.apra.gov.au/Policy/upload/PPG-113-March-GI-Internal-Models.pdf)
[4] Beder, T. S. 1995. VaR: Seductive but dangerous. Financial Analysts Journal 51:
11-24.
[5] Berger, A. N., R. J. Herring, and G. P. Szeg. 1995. The role of capital in
financial institutions. Journal of Banking and Finance 19: 393-430.
[6] Bowman, A. W., and A. Azzalini. 1997. Applied smoothing techniques for data
analysis. United States: Oxford University Press.
[7] Cech, C. 2006. Copula-based top-down approaches in financial risk aggregation.
Working paper, The University of Applied Sciences of bfi Vienna.
[8] Cherubini, U., E. Luciano, and W. Vecchiato. 2004. Copula methods in finance.
38
e-Thesys (98 )

Copula

England: John Wiley and Sons, Ltd.

[9] Clemente, A. D., and C. Romano. 2004. Measuring and optimizing portfolio
credit risk: A copula-based approach. Economic Notes 33: 325357.
[10] Coronado, M. 2000. Comparing different methods for estimating Value-at-Risk
(VaR) for actual non-linear portfolios: Empirical evidence. Proceedings of the
VII International Conference on Computational Finance and Forecasting
Financial Markets, London.
[11] Cummins, J. D., M. F. Grace, R. D. Phillips. 1999. Regulatory solvency
prediction in property-liability insurance: Risk-based capital, audit ratios, and
cash flow simulation. Journal of Risk and Insurance 66: 417-458.
[12] Cummins, J. D., S. E. Harrington, and G. Niehaus. 1993. An economic overview
of risk-based capital requirements for the property-liability insurance industry.
Journal of Risk Regulation 11: 427-447
[13] Cummins, J. D., S. E. Harrington, and G. Niehaus. 1995. Risk-based capital
requirements for property-liability insurers: a financial analysis. The Financial
Dynamics of the Insurance Industry, Edward I. Altman and Irwin T. Vanderhoof,
ed. Irwin Professional Publishers.
[14] Cummins, J. D., S. E. Harrington, and R. Klein. 1995. Insolvency experience,
risk-based capital, and prompt corrective action in property-liability insurance.
Journal of Banking and Finance 19: 511-527.
[15] Dowd, K. 1998. Beyond Value at Risk: The new science of risk management.
New York: John Wiley and Sons, Ltd.
[16] Eling, M., and D. Toplek. 2009. Modeling and management of nonlinear
dependencies-copulas in dynamic financial analysis. Journal of Risk and
Insurance 76: 651-681.
[17] Grace, M. F., S. E. Harrington, and R. W. Klein. 1998. Risk-based capital and
39
e-Thesys (98 )

Copula

solvency screening in property-liability insurance: Hypotheses and empirical

tests. Journal of Risk and Insurance 65: 213-243.
[18] He, X., and P. Gong. 2009. Measuring the coupled risks: a copula-based CVaR
model. Journal of Computational and Applied Mathematics 223: 1066-1080.
[19] Jouanin, J-F, G. Riboulet, and T. Roncalli. 2004. Financial applications of copula
functions. Risk Measures for the 21st Century, G. P. Szeg, ed. New York: John
Wiley and Sons, Ltd.
[20] Jorion, P. 1996. Risk2: Measuring the risk in Value at Risk. Financial Analysts
Journal 52: 47-56.
[21] Jorion, P. 2007. Value at Risk, 3rd edition. New York: McGraw-Hill.
[22] Kenney, R. 1967. Fundamentals of fire and casualty insurance strength, 4th
edition. Dedham, Massachusetts: Kenney Insurance Studies.
[23] Klein, R. W. 1995. Insurance regulation in transition. Journal of Risk and
Insurance 62: 363-404.
[24] Kopcke, R. W. 1996. Risk and the capital of insurance companies. New England
Economic Review, 27-42.
[25] Kupiec, P. H. 1995. Techniques for verifying the accuracy of risk measurement
models. Journal of Derivatives 2: 73-84.
[26] Mckeet, C. 1999. A bridge too VaR. North American Actuarial Journal 3: 66-71.
[27] McNeil, A. J., R. Frey, and P. Embrechts. 2005. Quantitative risk management:
concepts, techniques and tools. United States: Princeton University Press.
[28] Meister, E. 1998. Supervisory Capital Standards: Modernize or Redesign?
Economic Policy Review-Federal Reserve Bank of New York 4: 101-104.
[29] OConnor, R., J. Golden, and R. Reck. 1999. A Value-at-Risk calculation of
required reserves for credit risk in corporate lending portfolios. North American
Actuarial Journal 3: 72-83.
40
e-Thesys (98 )

Copula

[30] Panning, W. H. 1999. The strategic uses of Value at Risk: Long-term capital
management for property/casualty insurers. North American Actuarial Journal 2:
84-105.
[31] Rosenberg, J. V., and T. Schuermann. 2006. A general approach to integrated risk
management with skewed, fat-tailed risks. Journal of Financial Economics 79:
569-614.
[32] Saunders, A., and M. M. Cornett. 2006. Financial institutions management: a risk
management approach, 5th edition. International: McGraw-Hill.
[33] ShepheardWalwyn, T. and R. Litterman. 1998. Building a coherent risk
measurement and capital optimization model for financial firms. Paper presented
at the conference Financial Services at the Crossroads: Capital Regulation in the
21st Century, Federal Reserve Bank of New York.
[34] Sklar, A. 1959. Fonctions de rpartition n dimensions et leurs marges. Publ.
Inst. Statist. Univ. Paris 8: 229231.
[35] Swiss Re. 2000. Solvency of non-life insurers: Balancing security and
profitability expectations. Sigma 1/2000.
[36] Tang, A., and E. A. Valdez. 2009. Economic capital and the aggregation of risks
using copulas. Working paper, School of Actuarial Studies, University of New
South Wales, Sydney, Australia.

41
e-Thesys (98 )

Copula

1.

(RBC_life) 0.46 C0 + C4 + (C1O + C3 ) 2 + C12S + C 22

(/) 100%
2.

C0-
C1-
C1O-
C1S-

C0
C1
C1O=C1C1S
C1S

C2

C2

C3

C3

C4

C4

RBC_unadj=C0+C1+C2+C3+C4

RBC_life
TAC_life

RBC Ratio=TAC_life/RBC

C0(%)=
C0_RBC(%)=
C0/RBC_unadj
C0/RBC
C1(%)=
C1_RBC(%)=
C1/RBC_unadj
C1/RBC
C1O(%)=
C1O_RBC(%)=
C1O/RBC_unadj
C1O/RBC
C1S(%)=
C1S_RBC(%)=
C1S/RBC_unadj
C1S/RBC
C2(%)=
C2_RBC(%)=
C2/RBC_unadj
C2/RBC
C3(%)=
C3_RBC(%)=
C3/RBC_unadj
C3/RBC
C4(%)=
C4_RBC(%)=
C4/RBC_unadj
C4/RBC
C0(%)+C1(%)+C2
(%)+C3(%)+C4(%)

98 RBC

42
e-Thesys (98 )

Copula

1.0000

1.0000

1.0000

(
97.11.15 )

1.0000

(
97.11.15

1.0000

--()

0.8000

--
()

0.8000

ETF-()

0.8000

()

0.8000

()

0.8000

1.0000

1.0000

1.0000

()

98 RBC

43
e-Thesys (98 )

Copula

1.

(RBC_P & C)0.46 R0 + R5 + ( R1O + R4 ) 2 + R12S + R22 + R32a + R32b

(/) 100%
2.

R0

R1

R1O

R1S

-----

R2
R3a -
R3b -
R4
R5

R0(%)=
R0_RBC(%)=
R0
R0/RBC_unadj
R0/RBC
R1(%)=
R1_RBC(%)=
R1
R1/RBC_unadj
R1/RBC
R1O(%)=
R1O_RBC(%)=
R1O
R1O /RBC_unadj
R1O/RBC
R1S(%)=
R1S_RBC(%)=
R1S
R1S/RBC_unadj
R1S/RBC
R2(%)=
R2_RBC(%)=
R2
R2/RBC_unadj
R2/RBC
R3(%)=
R3a_RBC(%)=
R3a
R3a/RBC_unadj
R3a/RBC
R3b(%)=
R3b_RBC(%)=
R3b
R3b/RBC_unadj
R3b/RBC
R4(%)=
R4_RBC(%)=
R4
R4/RBC_unadj
R4/RBC
R5(%)=
R5_RBC(%)=
R5
R5/RBC_unadj
R5/RBC
R0(%)+R1(%)+R2
RBC_unadj=R0+R1+R2+R3a+R3b
(%)+R3a(%)+R3b(
+R4+R5
%)+R4(%)+R5(%)
RBC_P & C
TAC_P & C

RBC Ratio=TAC_P & C/RBC

98 RBC

44
e-Thesys (98 )

Copula

1.0000

1.0000

(
97.11.15 )

1.0000

(
97.11.15

1.0000

--()

0.8000

--
()

0.8000

ETF-()

0.8000

()

0.8000

()

0.8000

()

1.0000

1.0000

1.0000

()

98 RBC

45
e-Thesys (98 )