Efficient capital management using an internal model: a case of non-life insurance.

The main goal of insurance company management is to increase shareholders’ value and implement a strategy that promotes sustainable growth of the company. Well-known possible measures intended to achieve that goal are as follows: share price, economic value, market capitalisation, gross premiums earned and solvency ratio. These measures include efficient capital management as capital expenses could be a major cost position depending on risk appetite and the extent of capital needed to support it. This research focuses on non-life insurers for reserve risk modelling. In the current study, a more accurate risk quantification model has been developed than the standard model provided by the EU regulator under the Solvency II framework. The proposed model provides capital cost gains as well. A case study based on non-life real data set with underwriting in the Baltic countries is discussed with inclusion of pandemic trends that had an impact on economies and customer behaviours. The study considers different non-life reserve distributions for each insurance business line, risk aggregation and the way of choosing the most appropriate type of copula model for non-life reserve risk. Adequate capital is calculated by applying value at risk at 99.5%, which is mandatory in the EU market. The study considers which selected tests have to be implemented in order to choose the most appropriate copula model for reserve risk. [ABSTRACT FROM AUTHOR]