Use of an Internal Model in a General Insurance Company: Focus on Economic Capital Allocation
321 Pages Posted: 14 Oct 2012
Date Written: September 12, 2012
Capital allocation is an instrument for managing an insurance company. This is linked with three important fields of an insurance company: pricing, risk management and performance management. It is a tool for strategic management so as to decide to further invest in or discontinue a business line. The toolbox behind such an exercise contains coherent risk measures as well as coherent allocation principles. These constitutes the rigorous axiomatic part of the exercise, that may be relaxed for practical purposes. An application is proposed through an internal model approach, triggered by the frameworks of insurance current solvency regimes, namely United Kingdom (UK) Internal Capital Adequacy Standards (ICAS) and Solvency II. This application is dealing with the combination of Aumann-Shapley also known as Euler-gradient Capital allocation principles with VaR and TVaR.
Keywords: Value at Risk (VaR), Tail Value at Risk (TVaR), Coherent measure of risk, Coherent allocation of capital, Economic risk capital, Solvency II, Internal Capital Assessment (ICA), Internal model, Aumann-Shapley, Euler’s theorem
JEL Classification: C71, G11, G22, G31, G32
Suggested Citation: Suggested Citation