THE IMPACTS OF RESERVES MONETIZATION ON THE RUIN PROBABILITY AND SOLVENCY CAPITAL FOR INSURERS

Abstract

Objective: Assess the technical solvency of insurance companies by verifying assets’ returns effects on the ruin probability and their Solvency Capital related, that is the main regulatory and prudential instrument in the sector.

Background: Based on the Ruin Theory and the Collective Risk Theory, the classic Cramér-Lundberg risk model was used, whose operational dynamics is governed by a Compound Poisson Process, considering a hypothetical portfolio with Exponential distribution for the severity of claims.

Method: With simulated data, a modification in the Cramér-Lundberg model was proposed, by incorporating a structure of return on guarantee assets. To simulate the risk processes, the Monte Carlo Method approach was applied.

Results: High Solvency Capitals have dramatically reduced short-term ruin probability, and the returns of financial investments, on the other hand, is more effective to avoid medium and long-term ruins. Thus, it is recommended that capital management be based on the equilibrium of: (i) guarantee assets allocation in bonds that provide sustainable returns, and; (ii) quantification of the ideal solvency capital to deal with extreme claims in the first years of operation.

Contributions: In a moment when real interest rates are dropping, this work contributes: (i) from a managerial perspective, so that managers can anticipate the lower return adverse effects on the guarantee assets in their companies, adapting their investment policy, and; (ii) for the regulator, who must be aware of the systemic effects that ruins can cause in the sector.