On the use of Archimedean copulas for insurance modelling

Thilini Dulanjali Kularatne, Jackie Li, David Pitt

Research output: Contribution to journalArticlepeer-review

15 Citations (Scopus)

Abstract

In this paper, we explore the use of an extensive list of Archimedean copulas in general and life insurance modelling. We consider not only the usual choices like the Clayton, Gumbel–Hougaard, and Frank copulas but also several others which have not drawn much attention in previous applications. First, we apply different copula functions to two general insurance data sets, co-modelling losses and allocated loss adjustment expenses, and also losses to building and contents. Second, we adopt these copulas for modelling the mortality trends of two neighbouring countries and calculate the market price of a mortality bond. Our results clearly show that the diversity of Archimedean copula structures gives much flexibility for modelling different kinds of data sets and that the copula and tail dependence assumption can have a significant impact on pricing and valuation. Moreover, we conduct a large simulation exercise to investigate further the caveats in copula selection. Finally, we examine a number of other estimation methods which have not been tested in previous insurance applications.
Original languageEnglish
Pages (from-to)57-81
Number of pages25
JournalAnnals of Actuarial Science
Volume15
Issue number1
Early online date17 Jun 2020
DOIs
Publication statusPublished - Mar 2021

Keywords

  • Archimedean copulas
  • Empirical copulas
  • Estimation methods
  • Keywords:
  • Losses and allocated loss adjustment expenses
  • Mortality bond
  • Multi-population mortality modelling
  • Tail dependence

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