Using tail conditional expectation for capital requirement calculation of a general insurance undertaking

Abstract

In this paper we develop a solvency model to estimate the necessary economic capital of a real insurance undertaking operating solely in the Automobile branch, applying the Tail Conditional Expectation risk measure. The model assumes a one year time horizon static approach with an unchanged asset and liability structure for the company. After discussing the main factors affecting the whole of the insurance activity and their influence on the assets and liabilities on that real insurance undertaking used in the study, we calculate its necessary economic capital, by using the Monte Carlo simulation technique to generate the probability distribution of the possible future profit and losses with impact on the company’s fair value. This paper introduces an application of a set of techniques that are usually applied to manage asset and liability risks to capital requirements. With a simulated exercise applied to a real insurance undertaking we show its feasibility, its advantages and how useful it may be for investors, regulators and remaining stakeholders when the technique is explored in depth.