Upgrading an Existing Capital Model – A Common Risk Driver Application

In this paper we apply a simple regression model to link performance of a D&O insurance line of business to the S&P 500 economic variable from an economic scenario generator (ESG). The regression structure is incorporated into an existing economic capital model. The distribution of the error term is constrained so that the final distribution of the D&O line is equivalent to the distribution previously used. We explore the impact this model change has on the existing correlation structures.

Keywords: ERM, regression, correlation, risk drivers