ERM-710-14: Allocation of Capital in the Insurance Industry


Reading Source:

Topics Covered in this Reading:

  • Introduction
  • Using Capital Allocation to Maximize Value
    • Primary Link between Capital Allocation and Value Maximization
    • Framework for Capital Allocation
    • Risk Adjusted Return on Capital (RAROC)
    • Economic Value Added (EVA)
    • Economic Value Added on Capital (EVAOC)
  • Capital Allocation Techniques
    • Overview of Capital Allocation Techniques
  • Regulatory Risk-Based Capital (RBC)
    • RBC “Property-Liability” Insurers Components
  • The Capital Asset Pricing Model (CAPM)
    • Conclusions
    • Problems with this approach
  • Value at Risk (VaR)
    • Issues with VaR
  • The Insolvency Put Option
  • Recognizing Diversification: Marginal Capital Allocation
    • Merton and Perold (M-P) Model
    • Myers Read (M-R) Model
  • Additional Issues
  • Conclusion