Multivariate stress scenarios and solvency

Alexander J. McNeil*, Andrew D. Smith

*Corresponding author for this work

Research output: Contribution to journalArticlepeer-review


We show how the probabilistic concepts of half-space trimming and depth may be used to define convex scenario sets Qα for stress testing the risk factors that affect the solvency of an insurance company over a prescribed time period. By choosing the scenario in Qα which minimizes net asset value at the end of the time period, we propose the idea of the least solvent likely event (LSLE) as a solution to the forward stress testing problem. By considering the support function of the convex scenario set Qα, we establish theoretical properties of the LSLE when financial risk factors can be assumed to have a linear effect on the net assets of an insurer. In particular, we show that the LSLE may be interpreted as a scenario causing a loss equivalent to the Value-at-Risk (VaR) at confidence level α, provided the α-quantile is a subadditive risk measure on linear combinations of the risk factors. In this case, we also show that the LSLE has an interpretation as a per-unit allocation of capital to the underlying risk factors when the overall capital is determined according to the VaR. These insights allow us to define alternative scenario sets that relate in similar ways to coherent measures, such as expected shortfall. We also introduce the most likely ruin event (MLRE) as a solution to the problem of reverse stress testing.

Original languageEnglish
Pages (from-to)299-308
Number of pages10
JournalInsurance: Mathematics and Economics
Issue number3
Publication statusPublished - May 2012


  • Convex analysis
  • Risk measures
  • Scenario sets
  • Solvency II
  • Stress testing

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