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A Study on Measuring Aggregate Auto Insurance Risk with Stochastic Loss Model

  • Journal of Insurance and Finance
  • 2012, 23(1), pp.59-100
  • Publisher : Korea Insurance Research Institute
  • Research Area : Social Science > Business Management

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ABSTRACT

This paper measures risks(TVaR) for three auto insurance coverages -individual, non-individual liabilities, and others - depending upon the guidelines of the Korea Financial Supervisory Service(FSS). To do this,we use Heckman and Meyers CRM with a dataset containing insurance policies and claim settlements of 9 auto insurance companies. In addition,we measure an aggregated risks of all coverages using Heckman and Meyers CRM. We show that at the industry level, aggregated risks of all coverages amount to 839.3 billion KRW with the guidelines of the FSS. FSS requires to linearly add the risks for the three insurance coverages in measuring aggregated risks. However, the aggregated risks of the Heckman and Meyers CRM are measured to 822.1 billion KRW, down by 17.2 billion KRW in risks, as a result of a diversification effect. As such, We suggest our method in measuring aggregated risks of all coverages as insurers' optimal level of capital may be lower than the regulatory capital requirements required by the FSS.

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