Replicating portfolios: calibration techniques for the calculation of the Solvency II economic capital
DEVINEAU L. ; CHAUVIGNY M.
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Abstract
When endeavoring to build an internal model, life insurance companies are often faced with the choice of which method to use for the distribution of shareholder’s equity over one year. However, the highly stochastic nature of this type of approach can sometimes lead to significant calculation times that threaten to compromise its operational implementing. The use of calculation acceleration or approximation techniques therefore appears as essential to the application of such methods. One possible approach is the use of the Replicating Portfolios technique, in which the projection times are strongly reduced by an estimation of shareholder’s equity based on a portfolio of assets that replicates the best estimate of the company's liabilities. However, the calibration of the Replicating Portfolios method presents several difficulties that may lead to unsatisfactory results. In this article, we introduce a calibration technique that was developed in order to guarantee the robustness of the estimation of the Solvency II economic capital.
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