Stress scenario generation for solvency and risk management. Issue 6 (2nd July 2016)

• Record Type: Journal Article
• Authors: Christiansen, Marcus Christian; Henriksen, Lars Frederik Brandt; Schomacker, Kristian Juul; Steffensen, Mogens
• Is Part Of: Scandinavian actuarial journal. Volume 2016:Issue 6(2016)
• Page Start: 502
• Page End: 529
• Publication Date: 2016-07-02
• Subjects: life insurance -- worst-case scenario -- deterministic control -- Solvency II -- multistate Markov chain; Insurance, Life -- Mathematics -- Periodicals; Insurance -- Mathematics -- Periodicals; 368.01
• DOI: 10.1080/03461238.2014.971860
• Languages: English
• ISSNs: 0346-1238

Abstract

Abstract : We derive worst-case scenarios in a life insurance model in the case where the interest rate and the various transition intensities are mutually dependent. Examples of this dependence are that (a) surrender intensities and interest rates are high at the same time, (b) mortality intensities of a policyholder as active and disabled, respectively, are low at the same time, and (c) mortality intensities of the policyholders in a portfolio are low at the same time. The set from which the worst-case scenario is taken reflects the dependence structure and allows us to relate the worst-case scenario-based reserve, qualitatively, to a Value-at-Risk-based calculation of solvency capital requirements. This brings out perspectives for our results in relation to qualifying the standard formula of Solvency II or using a scenario-based approach in internal models. Our results are powerful for various applications and the techniques are non-standard in control theory, exactly because our worst-case scenario is deterministic and not adapted to the stochastic development of the portfolio. The formalistic results are exemplified in a series of numerical studies.