Multiple shock dependencies with applications to insurance risks
Traditional insurance models build on the assumption of independence of risks. One of the main causes of the recent financial crisis, this assumption has facilitated the quantification of risks for decades, but it has often lead to risks' under-estimation and as a result under-pricing. Importantly, one of the prime pillars of the novel concept of Enterprise Risk Management is the requirement that insurance companies have a clear understanding of risks' interconnections within the risk portfolios. However, modeling dependence is not an easy call. In fact, there is only one way to formulate independence, whereas the shapes of probabilistic dependence are infinite. In this project, we aim at developing tractable technically and interpretable practically probabilistic models of dependence that describe the adverse effects of multiple risk drivers on the risk portfolio of a generic insurer. The outcomes will be applied to the Own Risk and Solvency Assessment of Sun Life Financial.