Risk Modeling for Future Cash Flow Using Skew t-Copula

Abstract

In this article, we estimate future annual cash flow of an insurance company. Data of three main different business lines of the company are used to predict the next year's cash flow. The individual business lines are modelled by Gamma, Pareto and lognormal distributions. Daily payments were correlated and therefore the joint distribution of the business lines was found. As the model, the skew t-copula introduced in Kollo and Pettere (2010) was used. Simulation from the joint distribution was carried out to predict the next year's cash flow. The obtained results were compared with the case when the dependencies between the business lines were not taken into account. Presented model gives stochastic approach for future payments.

Keywords:

• Loss distributions
• Method of moments
• Simulation
• Skew t-copula
• Skew t-distribution
• VaR

Mathematics Subject Classification:

• Primary 62P05, 62E17
• Secondary 62F10

Acknowledgment

Tnu Kollo gratefully acknowledges financial support from the Estonian Research Foundation through grant 7435.