Aggregation of underwriting risks in insurance industry of Iran using vine copula

Abstract

In this paper, the underwriting risks of the insurance industry of Iran were aggregated using various vine copula classes and historical data of loss ratios which corresponds to each business line. The estimated economic capital (EC) for the entire insurance industry considerably varies across different risk measures and vine copula models. In addition, less than the risk-based capital (RBC) charge assessed based on the standard model of RN69 and amounted to 96,943,391 million of Iran Rials. Therefore, it was concluded that using the Vine copula method and allowing symmetry and tail dependence for pairs of business lines’ risks in the risk aggregation process leads to overestimation of the RBC risk charge, as compared to the estimated results of simple and linear aggregation methods of such standard model. Furthermore, the choice of dependency structure and risk measures have a paramount effect on the aggregate economic capital. Highlights: Estimated aggregated economic capital varies across different risk measures and vine copula models; Selecting the appropriate copula model is an important consideration in risk aggregation process; Using the Vine copula method in the risk aggregation leads to overestimation of the RBC risk charge; The estimated economic capital is less than RBC risk charge calculated under standard model of RN69.