Economic Capital Determination for Non-Life Insurance Using Copulas

Abstract

In the light of the not-too-distant ago financial crisis that brought the interconnectedness of financial risks into focus, this paper set out to evaluate the economic capital of the non-life insurance industry in Ghana by evaluating the total risk exposure of the industry via value at risk and conditional value at risk. The paper employed the copula-based ARMA-GARCH model on quarterly premium, claims and asset data of the Ghanaian non-life insurance industry spanning the period 2012Q4 to 2020Q4. All lines of business in the non-life insurance industry in Ghana were considered and predictions were made for the next 8 quarters of the data. It was found that over the quarters in 2021 and 2022, there is a 5% chance that in each quarter the industry will lose more than 64% of its entire portfolio and that should extreme events trigger such losses then it should be expected that losses will amount to about 80% of the industry portfolio. It was further found that there is a 1% chance in each of the quarters from 2021 to 2022, that the non-life insurance industry’s portfolio will be wiped out. Such an event, though as remote as 1 out of 100, can have dire consequences for the economy and financial sector and therefore the non-life insurance industry is one area of the Ghanaian financial sector that must be closely monitored to avert any such catastrophe.