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  4. Quadratic Unconstrained Binary Optimization Approach for Incorporating Solvency Capital into Portfolio Optimization
 
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January 29, 2024
Journal Article
Title

Quadratic Unconstrained Binary Optimization Approach for Incorporating Solvency Capital into Portfolio Optimization

Abstract
In this paper, we consider the inclusion of the solvency capital requirement (SCR) into portfolio optimization by the use of a quadratic proxy model. The Solvency II directive requires insurance companies to calculate their SCR based on the complete loss distribution for the upcoming year. Since this task is, in general, computationally challenging for insurance companies (and therefore, not taken into account during portfolio optimization), employing more feasible proxy models provides a potential solution to this computational difficulty. Here, we present an approach that is also suitable for future applications in quantum computing. We analyze the approximability of the solvency capital ratio in a quadratic form using machine learning techniques. This allows for an easier consideration of the SCR in the classical mean-variance analysis. In addition, it allows the problem to be formulated as a quadratic unconstrained binary optimization (QUBO), which benefits from the potential speedup of quantum computing. We provide a detailed description of our model and the translation into a QUBO. Furthermore, we investigate the performance of our approach through experimental studies.
Author(s)
Turkalj, Ivica
Fraunhofer-Institut für Techno- und Wirtschaftsmathematik ITWM  
Assadsolimani, Mohammad
Braun, Markus  
Halffmann, Pascal
Fraunhofer-Institut für Techno- und Wirtschaftsmathematik ITWM  
Hegemann, Niklas  
Kerstan, Sven
Sharma, Shivam
Fraunhofer-Institut für Techno- und Wirtschaftsmathematik ITWM  
Maciejewski, Janik
Zhou, Yuanheng
Journal
Risks  
Open Access
DOI
10.3390/risks12020023
Language
English
Fraunhofer-Institut für Techno- und Wirtschaftsmathematik ITWM  
Keyword(s)
  • quadratic unconstrained binary optimizaton

  • potfolio optimization

  • proxy modeling

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