Copula Effect on Investment Portfolio of an Insurance Company / Junginių Įtakos Draudimo Kompanijos Investiciniam Portfeliui Tyrimas

Abstract

Abstract. For an insurance company, the planning has to be carried out under uncertainty. Thus, the decision making model includes the parameters that are not completely known at the current point of time, when the decision has to be taken. These parameters can be named as risk factors. The activity of insurance company is affected by many risk factors, thus the multivariate uncertainty space, where the correlations among these factors are possible, can be constructed. For their dependency structure, the alternative method -copula functions -are employed, which allows to model the non-linear dependencies between the correlated stochastic variables. The purpose of this work is to explore the copula effect on the investment portfolio of the insurance company. The insurance business is influenced by a large number of stochastic parameters, and decisions concerning the assets that must be invested over time to cover liabilities and to achieve goals subject to various uncertainties and various constraints are considered. Two approaches of making decision models under uncertainty are applied in the integrated dynamic management of insurance company's financial assets and liabilities. One of them allows to evaluate the company's strategy and technically is based on stochastic simulation. The other approach generates a strategy from the stochastic optimization model. Two copula functions -Gaussian copula and Student's t-copula -concerning the investment performance are employed while generating the set of scenarios for representing the behaviour of risk factors in the multivariate structure.