Alternative Capital Requirement for Insurers: Possibilities and Issues

Abstract

Solvency II framework regulates how much capital the insurance companies of the European Union must hold. Although the framework lasts four years, there is still place for improvements considering experience. The goals of the research are to propose an alternative capital model methodology using copulas for reserve risk and to show the case study of potential capital shift impact. To conduct the research, the authors have used the extensive literature review, analytical methods and modelling. Research scope is non-life insurance companies under the Solvency II framework with a focus on reserve risk. The research will help avoid that alternative models are only a modern risk management tool and add risk management reality. Higher capital surplus can be achieved if a copula approach is used for risk aggregation in the Baltic non-life market. The Baltic market does not use alternative capital requirement and internal models. Using an alternative model is the right insurer's approach in modern risk management.