Allocation of Capital

  • Marcus Kriele
  • Jochen Wolf
Part of the EAA Series book series (EAAS)

Abstract

In order to fully account for diversification, risk capital is typically calculated for the company as a whole. From a management perspective, it would however be advantageous to allocate risk capital to the individual lines of business or functions of the insurance company. Because of the diversification effect, there cannot be a unique “correct” method to do so, but there are various approaches of different plausibility and complexity. We introduce the most common capital allocation methods. Then we present the approach of Kalkbrener who starts from an axiomatic system that describes the properties a good capital allocation algorithm should have. It turns out that his approach puts restrictions on the choice of risk measures, which are however satisfied by coherent risk measures. An implementation of his algorithm typical requires Monte Carlo methods, but the algorithm is easier to communicate than most other methods.

Keywords

Covariance 

References

  1. 1.
    Committee of European Insurance and Occupational Pensions Supervisors (CEIOPS). Advice on sub-group supervision, diversification effects, cooperation with third countries and issues related to the MCR and the SCR in a group context, November 2006. Document CEIOPS-DOC-05/06 Google Scholar
  2. 2.
    Eidgenössische Finanzmarktaufsicht (FINMA), Draft: Modelling of Groups and Group Effects (2006) Google Scholar
  3. 3.
    D. Filipović, M. Kupper, Optimal capital and risk transfers for group diversification. Math. Finance 18(1), 55–76 (2008) CrossRefMATHMathSciNetGoogle Scholar
  4. 4.
    M. Kalkbrener, An axiomatic approach to capital allocation. Math. Finance 15(3), 425–438 (2005) CrossRefMATHMathSciNetGoogle Scholar
  5. 5.
    M. Reed, B. Simon, Methods of Modern Mathematical Physics I: Functional Analysis (Academic Press, New York, 1980) MATHGoogle Scholar
  6. 6.
    M. Urban, Allokation von Risikokapital auf Versicherungsportfolios. Master thesis, TU München (2002) Google Scholar

Copyright information

© Springer-Verlag London 2014

Authors and Affiliations

  • Marcus Kriele
    • 1
  • Jochen Wolf
    • 2
  1. 1.HobokenUSA
  2. 2.Fachbereich Mathematik und TechnikHochschule KoblenzRemagenGermany

Personalised recommendations