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Tedypendah
Topic Author
Posts: 147
Joined: May 26th, 2013, 10:11 am

### Does the Solvency II correlation matrix (or any other correlation matrix) imply Pearsn's rho and hence normality?

Hi all,I am busy with an exercise as part of building an Economic Capital model at an Insurance Company. Suppose I quantify my Lapse risk to be 2000, can someone confirm if I am right in assuming a normal distribution for the Lapse risk here. I think I read that one of the assumptions underlying the Solvency II standard formula is normality for individual risks but I can't seem to locate where I read it. 1) Is it enough to assume normality of individual risks when they are aggregated using a correlation matrix which means that a correlation matrix implies Pearson's rho? 2) Can we have a correlation matrix made up of Kendall's Tau?
Last edited by Tedypendah on March 29th, 2015, 10:00 pm, edited 1 time in total.

Tedypendah
Topic Author
Posts: 147
Joined: May 26th, 2013, 10:11 am

### Does the Solvency II correlation matrix (or any other correlation matrix) imply Pearsn's rho and hence normality?

Last edited by Tedypendah on March 29th, 2015, 10:00 pm, edited 1 time in total.

Tedypendah
Topic Author
Posts: 147
Joined: May 26th, 2013, 10:11 am

### Does the Solvency II correlation matrix (or any other correlation matrix) imply Pearsn's rho and hence normality?

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Samsaveel
Posts: 436
Joined: April 20th, 2008, 5:47 am

### Does the Solvency II correlation matrix (or any other correlation matrix) imply Pearsn's rho and hence normality?

correlation is a linear measure of dependence,implicit assumption is normality.

Tedypendah
Topic Author
Posts: 147
Joined: May 26th, 2013, 10:11 am

### Does the Solvency II correlation matrix (or any other correlation matrix) imply Pearsn's rho and hence normality?

Thanks Samsaveel, but Kendall's Tau is also correlation (rank)...im really confused. Or did you mean to say correlation matrix implies linear correlation i.e we can't use Kendall's Tau in a correlation matrix?

Samsaveel
Posts: 436
Joined: April 20th, 2008, 5:47 am

### Does the Solvency II correlation matrix (or any other correlation matrix) imply Pearsn's rho and hence normality?

linear correlation is very confusing !it is used everywhere in finance , it only makes sense if the underlying RV ( Bivariate , Multivariate)are normal,or more generallycome from the elliptical world ,send me a pm ,will dig up a good paper that goes into details.

Tedypendah
Topic Author
Posts: 147
Joined: May 26th, 2013, 10:11 am

### Does the Solvency II correlation matrix (or any other correlation matrix) imply Pearsn's rho and hence normality?

Thanks a lot Sam, will pm you.
Last edited by Tedypendah on April 2nd, 2015, 10:00 pm, edited 1 time in total.