Reserve Risk Analysis and Dependence Modeling in Non-Life Insurance: The Solvency II Project
Reserve Risk Analysis and Dependence Modeling in Non-Life Insurance: The Solvency II Project

Summary/Abstract: The adoption of the new prudential directive “Solvency II” urges insurance companies to improve their internal models in accordance with their own capital stocks, reserve, Solvency Capital Requirement in order to anage properly their risks. The reserve risk is considered as the main risk in non- life insurance determining the solvency capital. The aim of this paper is twofold: to model the reserve risk of a part of non- life portfolio and to evaluate the necessary capital to cover it under the internal model of the Solvency II project, taking into account the dependence between the branches. For this purpose, our analysis begins by assessing reserve risk over the ultimate horizon of payments development, using stochastic models and a simulation technique to determine the distribution of reserve, in the case of two insured risks; the motor damages and the motor third- party liability. Then, we use a copula theory modeling in order to detect the dependence between the two insurance business lines. Finally, we provide a comparative analysis of alternative schemes measuring adequately SCR under the independence and dependence cases for both standard and internal models. Using original data collected on Tunisian Insurance companies, our results reveal that internal model provides better estimates of solvency funds.

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