Modeling and Management of Nonlinear Dependencies - Copulas in Dynamic Financial Analysis

University of St. Gallen, Risk Management and Insurance Working Paper No. 34

40 Pages Posted: 26 Mar 2007 Last revised: 10 Jun 2013

See all articles by Martin Eling

Martin Eling

University of St. Gallen - Institute of Insurance Economics; University of Saint Gallen - School of Finance (SoF)

Denis Toplek

University of St. Gallen

Multiple version iconThere are 2 versions of this paper

Date Written: April 5, 2009

Abstract

The aim of this paper is to study the influence of nonlinear dependencies on a nonlife insurer's risk and return profile. To achieve this, we integrate several copula models in a dynamic financial analysis (DFA) framework and conduct numerical tests within a simulation study. We also test several management strategies in response to adverse outcomes generated by nonlinear dependencies. We find that nonlinear dependencies have a crucial influence on the insurer's risk profile that can hardly be affected by the analyzed management strategies. Depending on the copula concept employed, we find large differences in risk assessment for the ruin probability and for the expected policyholder deficit. This has important implications for regulators and rating agencies that use these risk measures as a foundation for capital standards and ratings.

Keywords: Enterprise Risk Management, Dynamic Financial Analysis, Copulas

JEL Classification: C15, G22, G31, G32

Suggested Citation

Eling, Martin and Toplek, Denis, Modeling and Management of Nonlinear Dependencies - Copulas in Dynamic Financial Analysis (April 5, 2009). University of St. Gallen, Risk Management and Insurance Working Paper No. 34 . Available at SSRN: https://ssrn.com/abstract=973758 or http://dx.doi.org/10.2139/ssrn.973758

Martin Eling (Contact Author)

University of St. Gallen - Institute of Insurance Economics ( email )

Kirchlistrasse 2
St. Gallen, 9010
Switzerland

University of Saint Gallen - School of Finance (SoF) ( email )

Unterer Graben 21
St.Gallen, CH-9000
Switzerland

Denis Toplek

University of St. Gallen ( email )

Kirchlistrasse 2
St. Gallen, St. Gallen 9000
Switzerland

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