Modeling and Management of Nonlinear Dependencies - Copulas in Dynamic Financial Analysis
The aim of this paper is to study the influence of nonlinear dependencies on a nonlifeinsurers risk and return profile. To achieve this, we integrate several copulamodels in a dynamic financial analysis (DFA) framework and conduct numericaltests within a simulation study. We also test several risk management strategies inresponse to adverse outcomes generated by nonlinear dependencies. We find thatnonlinear dependencies have a crucial influence on the insurers risk profile that canhardly be affected by the analyzed management strategies. Depending on the copulaconcept employed, we find large differences in risk assessment for the ruinprobability and for the expected policyholder deficit. This has important implicationsfor regulators and rating agencies that use these risk measures as a foundationfor capital standards and ratings.
C15 - Statistical Simulation Methods; Monte Carlo Methods ; G22 - Insurance; Insurance Companies ; G31 - Capital Budgeting; Investment Policy ; G32 - Financing Policy; Capital and Ownership Structure ; Management of insurance ; Individual Working Papers, Preprints ; No country specification