Systemic sovereign risk in the valuation of solvency capital requirements

Motivated by the possibility of a systemic crisis in the quality of sovereign credit standings, we investigate the effects of a systemic component in default correlations for typical Italian life insurance segregated fund portfolios, comparing with a more traditional approach where such component is absent. The systemic effects are modelled with a multidimensional Marshall-Olkin model, that – in addition – allows to describe possible segmentation effects of the market. In particular, we compare the valuation of the Solvency Capital Requirement in the Solvency II framework under the classical CreditRisk+approach and the Marshall-Olkin model.