Economic Capital Allocation Derived from Risk Measures

North American Actuarial Journal, Vol. 7, No. 2, pp. 44-59, 2003

16 Pages Posted: 1 Mar 2006

See all articles by Jan Dhaene

Jan Dhaene

Katholieke Universiteit Leuven

Marc Goovaerts

Catholic University of Leuven (KUL) - Department of Economics

Rob Kaas

University of Amsterdam - Faculty of Economics & Econometrics (FEE)

Abstract

We examine properties of risk measures that can be considered to be in line with some "best practice" rules in insurance, based on solvency margins. We give ample motivation that all economic aspects related to an insurance portfolio should be considered in the definition of a risk measure. As a consequence, conditions arise for comparison as well as for addition of risk measures. We demonstrate that imposing properties that are generally valid for risk measures, in all possible dependency structures, based on the difference of the risk and the solvency margin, though providing opportunities to derive nice mathematical results, violates best practice rules. We show that so-called coherent risk measures lead to problems. In particular we consider an exponential risk measure related to a discrete ruin model, depending on the initial surplus, the desired ruin probability, and the risk distribution.

Suggested Citation

Dhaene, Jan and Goovaerts, Marc and Kaas, Rob, Economic Capital Allocation Derived from Risk Measures. North American Actuarial Journal, Vol. 7, No. 2, pp. 44-59, 2003, Available at SSRN: https://ssrn.com/abstract=887022

Jan Dhaene (Contact Author)

Katholieke Universiteit Leuven ( email )

Naamsestraat 69
Leuven, 3000
Belgium

Marc Goovaerts

Catholic University of Leuven (KUL) - Department of Economics ( email )

Leuven, B-3000
Belgium
+32 0 16 32 7446 (Phone)
+32 0 16 32 3740 (Fax)

Rob Kaas

University of Amsterdam - Faculty of Economics & Econometrics (FEE) ( email )

Roetersstraat 11
Amsterdam, 1018 WB
Netherlands

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
828
Abstract Views
3,540
rank
41,406
PlumX Metrics