Capital Requirement for Non-life Insurance Industry using D-vine Copula: An Empirical Evidence from Malaysia.

Generally, insurance companies face challenges in determining the Capital Requirement (CR) which is essential for business continuity. This situation could worsen if substantial number and amount of claims are requested by policyholders due to losses from catastrophic events such as floods, tsunamis, and earthquakes. In this paper, we propose a structured model to determine the CR for non-life insurance companies through loss ratios. Firstly, dependence structure among the business lines is modelled using copulas from both Elliptical and Archimedean copulas family with loss ratios from four business lines as the risk factors. The loss ratios are derived from incurred claims and earned premiums data of Malaysia’s non-life insurance businesses, such as Fire insurance, Motor insurance, Marine, Aviation and Transport (MAT) insurance, and Miscellaneous insurance. Subsequently, a combination of popular risk measures such as Value-at-Risk (VaR) and TailValue-at-Risk (TVaR) with a Drawable Vine (D-Vine) copulas model known as hybrid model is developed to estimate insurance companies’ risk capital. Finally, a simulation of Monte Carlo is commanded by calibrating data with our selected model to project the CR. This study contributes to the literature by addressing the problem of determining the appropriate CR for non-life insurance companies, proposing an empirical model based on real non-life insurance company data with a hybrid model built from risk measures and D-Vine copula. [ABSTRACT FROM AUTHOR]