Dias, Alexandra orcid.org/0000-0003-0210-552X, Ismail, Isaudin and Aihua, Zhang (2025) Copula-Based Risk Aggregation and the Significance of Reinsurance. Risks. 44. ISSN 2227-9091
Abstract
Insurance companies need to calculate solvency capital requirements in order to ensure that they can meet their future obligations to policyholders and beneficiaries. The solvency capital requirement is a risk management tool essential for addressing extreme catastrophic events that result in a high number of possibly interdependent claims. This paper studies the problem of aggregating the risks coming from several insurance business lines and analyses the effect of reinsurance on the level of risk. Our starting point is to use a hierarchical risk aggregation method which was initially based on two-dimensional elliptical copulas. We then propose the use of copulas from the Archimedean family and a mixture of different copulas. Our results show that a mixture of copulas can provide a better fit to the data than an individual copula and consequently avoid over- or underestimation of the capital requirement of an insurance company. We also investigate the significance of reinsurance in reducing the insurance company’s business risk and its effect on diversification. The results show that reinsurance does not always reduce the level of risk, but can also reduce the effect of diversification for insurance companies with multiple business lines.
Metadata
Item Type: | Article |
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Authors/Creators: |
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Copyright, Publisher and Additional Information: | © 2025 by the authors. |
Keywords: | Reinsurance,Capital requirements,Risk aggregation,Copula-models,Diversification |
Dates: |
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Institution: | The University of York |
Academic Units: | The University of York > Faculty of Social Sciences (York) > The York Management School |
Depositing User: | Pure (York) |
Date Deposited: | 26 Feb 2025 11:00 |
Last Modified: | 27 Feb 2025 00:09 |
Published Version: | https://doi.org/10.20944/preprints202410.0743.v1 |
Status: | Published |
Refereed: | Yes |
Identification Number: | 10.20944/preprints202410.0743.v1 |
Open Archives Initiative ID (OAI ID): | oai:eprints.whiterose.ac.uk:222417 |
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Filename: risks-13-00044.pdf
Description: Copula-Based Risk Aggregation and the Significance of Reinsurance
Licence: CC-BY 2.5