Session: 04, 63

Education

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Summary

This paper addresses the allocation of solvency capital in multi-line financial businesses. Although this paper is uniformely applicable to financial enterprises of all types, the terminology in the paper is mainly that of insurance. The TailVaR risk measure is extended in a natural way to allocating capital to each of the business units. This method of allocation allocates capital in a way that is invariant over the method of decomposing the enterprise into business units. Analytic results are derived in the case of multivariate Normal risks. The key result of this paper is that the TailVaR-based proportional allocation of total required capital is identical to that based on mean-variance considerations analogous to the CAPM in the case of the multivariate Normal distribution. The allocation methodology results are then applied to a real bancassurance portfolio of 10 lines of business to illustrate the various concepts discussed in the paper.

Session: 54

General Insurance

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Session: 14

AFIR/ERM

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Summary

This paper addresses the allocation of solvency capital in multi-line financial businesses.
Although this paper is uniformly applicable to financial enterprises of all types, the terminology in the paper is mainly that of insurance. The TailVaR risk measure is extended in a natural way to allocating capital to each of the business units. This method of allocation allocates capital in a way that is invariant over the method of decomposing the enterprise into business units. Analytic results are derived in the case of multivariate Normal risks. The key result of this paper is that the TailVaR-based proportional allocation of total required capital is identical to that based on mean-variance considerations analogous to the CAPM in the case of the multivariate Normal distribution. The allocation methodology results are then applied to a real bancassurance portfolio of 10 lines of business to illustrate the various concepts discussed in the paper.

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Harry Panjer is Professor of actuarial science at the University of Waterloo in Canada. He has previously taught actuarial science at the Universities of Western Ontario and Texas at Austin. He is the author of many papers in actuarial journals dealing with modelling insurance risk, co-author of the books Insurance Risk Models, Loss Models: from Data to Decisions and Financial Economics: with Applications to Investments, Insurance and Pensions. 

Dr Panjer holds a PhD in Mathematics and is a Fellow of the Society of Actuaries (USA) and the Canadian Institute of Actuaries (CIA) and an Honorary Fellow of the Institute of Actuaries (UK). He is a Past President of the Canadian institute of Actuaries and is currently President-Elect of the Society of Actuaries (USA).

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