Solvency II Capital with Correlated Risks: Evidence from General Insurance

Abstract

This paper examines dependency among the line of business in the non-life insurance industry towards arriving at solvency II margin capital requirements. The accurate dependence between lines of business is crucial for capital allocation. The factors attributed to variability in claim volumes by segments are derived by longitudinal analysis using a simpler way than the loss triangle chain-ladder method. We estimate the correlation among major segments of losses of all non insurance firms in India during the period 2001 to 2020. The important insight is the degree of dependency that remain stable across the lines of business, irrespective of the changes to the growth or fall in market share of the firm. We show that dependency among lines are crucial in determining the insurer’s risk capital. Our results show that there exists strong relation between segments of fire, marine and property & miscellaneous, respectively. Further, the profit transfers to shareholders have remained negatively correlated with the net premiums earned. The implications of these findings are important in respect of making provisions for solvency capital reserve by non-life insurers.