Based On Copulas Connect Function Of Life Insurance Economic Capital Measurement Research

With the fast development of Chinese insurance industry, insurancecompanies gradually tend to focus on the quality of the businessdevelopment as well as risk control and prevention to steadily improveeconomic efficiency, As for the insurance industry, Economic Capital isthe capital they should hold to deal with the unexpected risk. EconomicCapital becomes the popular internal capital management frameworkand ERM tool in global insurance industry, and also already getinsurance companies’ and regulators’ approval in the home. A keyproblem that insurance industry measure total Economic Capital is risksintegration. The traditional measuring methods in the literatures oftenuse simple risks dependent hypothesis to integrate risks, such ascompletely related or linear correlation of risks. In fact, thediversification of modern insurance products and the complicated ofinsurance contracts make risk measurement be not able to accuratelydescribe the various and complex relationship of risks under the linearrelated assumption. So these cant accurately give Economic Capitalvalue.Copula functions (also called connection functions) are widelyused to measure the dependency relationships of variables. Thedevelopment of Copula functions and related theories providestheoretical basis and quantitative methods for insurance industry tocalculate Economic Capital by Copula functions. The accuratemeasurement of the insurance industry’s Economic Capital is helpful tomaintain a reasonable asset scale and reduce unnecessary assets. Itcan also enhance the flexibility of the assets investment which willincrease assets investment returns as well as improve shareholders’value and benefits of the insurance companies.Measure the given period expected maximum loss in a confidence level commonly uses VaR(Value at Risk) method. According to describethe characteristics of "risk" or "loss", we also can calculate TVaR(Tail-VaR). Through collecting, sorting and analysing the compensationdata of the health insurance and life insurance, we get Frank Copulafunction to simulate dependency structure between the healthinsurance and life insurance. Monte Carlo simulation is used to estimatethe VaR and TVaR of the Economic Capital. When the life insuranceindustry compensation amount to the minimum value, the healthinsurance policies take up the optimal proportion of the whole policiesof life insurance industry. Based on this, we get the amount of EconomicCapital and the proportion it accounts for the premium income of lifeinsurance industry. It is our life insurance industry need in November of2011to cover unexpected loss and face risk impact. The measurementof Economic Capital based on Copula functions provides referenceand basis for insurance supervision department to regulate lifeinsurance companies.