RMK Economic Capital Allocation Model And Its Application Based On Copula

There is certain underwriting risk in the operating of each product line of the insurance companies. In order to buffer possible risks, we should allocate economic capital to the product line according to the difference of profits and risk of each line of business. At the same time, friction in the capital market and the issures of agents and information is also the reason that the insurance company should allocate the economic capital.The main content can be divided into three parts.Firstly, I introduce the economic capital calculation methods based on the Copula function. Random simulation through Copula function is a very good tool to build a multiple distribution function with different marginal distribution, and can catch all the relationship between different product lines. Basing on the two-dimensional model of risk, I make assessment of the impact of different marginal distribution, different Copula function and various relationship structures on the economic capital. Then, I elaborate on the choice of the Copula function in the multi-dimensional risk related model.Secondly, I focus on the economic capital allocation model of underwriting risk of property insurance company. After introducing the RMK model and demonstrating its applicability, this dissertation generalizes the RMK model under the loss rate, then make allocation of the economic capital based on different Copula function and make comparative analysis, finally I make comparative analysis on the allocation of economic capital under different confidence level.Finally, this dissertation discusses the application of the RMK model based on the Copula function, including risk-adjusted performance evaluation and re-insurance application. In the risk-adjusted performance evaluation, through measuring the occupation cost of capital and the cost of capital requirement of various line of business, this dissertation calculates the RROC and the RAROC, and makes some comparative analysis. In the re-insurance applications, this dissertation discusses four main issues: the choice of reinsurance plan; the allocation of reinsurance premium among different line of business; the allocation of surplus commission among policy years; the allocaiton of target profit load among different line of bussiness.