Related papers: A risk management approach to capital allocation
The economic equities maximization criterion (MFPE) leads to the choice of financial portfolio, which maximizes the ratio of the expected value of the insurance company on the capital. This criterion is presented in the framework of a…
This article proposes a new class of risk-sharing rules by exploring the relationship between capital allocation and risk sharing. While the former is concerned with ex-ante allocating capitals to different lines of business within a…
The Basel II internal ratings-based (IRB) approach to capital adequacy for credit risk plays an important role in protecting the Australian banking sector against insolvency. We outline the mathematical foundations of regulatory capital for…
Under Solvency II, the Value-at-Risk (VaR) is applied, although there is broad consensus that the Expected Shortfall (ES) constitutes a more appropriate risk measure. Moving towards ES would necessitate specifying the corresponding ES…
Portfolio optimization methods have evolved significantly since Markowitz introduced the mean-variance framework in 1952. While the theoretical appeal of this approach is undeniable, its practical implementation poses important challenges,…
The subject of the present article is the study of correlations between large insurance companies and their contribution to systemic risk in the insurance sector. Our main goal is to analyze the conditional structure of the correlation on…
The paper discusses capital allocation using the Euler formula and focuses on the risk measures Value-at-Risk (VaR) and Expected shortfall (ES). Some new results connected to this capital allocation is known. Two examples illustrate that…
In this paper we develop a novel methodology for estimation of risk capital allocation. The methodology is rooted in the theory of risk measures. We work within a general, but tractable class of law-invariant coherent risk measures, with a…
A discrete time probabilistic model, for optimal equity allocation and portfolio selection, is formulated so as to apply to (at least) reinsurance. In the context of a company with several portfolios (or subsidiaries), representing both…
Managing insurance and financial risk when data is limited is a key task in the insurance industry. In this paper, we focus on cases where the risk distribution is modeled as a mixture with some components estimable to high precision or…
We study two different contributions to the theory of (scalar) systemic risk measures. Namely the first aggregate or axiomatic approach and the first inject capital approach. For this purpose we establish a general framework, which is rich…
Optimal reinsurance when Value at Risk and expected surplus is balanced through their ratio is studied, and it is demonstrated how results for risk-adjusted surplus can be utilized. Simplifications for large portfolios are derived, and this…
We analyze multiline pricing and capital allocation in equilibrium no-arbitrage markets. Existing theories often assume a perfect complete market, but when pricing is linear, there is no diversification benefit from risk pooling and…
This paper considers an insurer with two collaborating business lines that faces three critical decisions: (1) dividend payout, (2) reinsurance coverage, and (3) capital injection between the lines, in the presence of model uncertainty. The…
This work initiates research into the problem of determining an optimal investment strategy for investors with different attitudes towards the trade-offs of risk and profit. The probability distribution of the return values of the stocks…
To quantify an operational risk capital charge under Basel II, many banks adopt a Loss Distribution Approach. Under this approach, quantification of the frequency and severity distributions of operational risk involves the bank's internal…
This paper considers an insurer with two collaborating business lines, and the risk exposure of each line follows a diffusion risk model. The manager of the insurer makes three decisions for each line: (i) dividend payout, (ii)…
On March 4th 2016 the Basel Committee on Banking Supervision published a consultative document where a new methodology, called the Standardized Measurement Approach (SMA), is introduced for computing Operational Risk regulatory capital for…
One possible way of risk management for an insurance company is to develop an early and appropriate alarm system before the possible ruin. The ruin is defined through the status of the aggregate risk process, which in turn is determined by…
Despite the fact that the Euler allocation principle has been adopted by many financial institutions for their internal capital allocation process, a comprehensive description of Euler allocation seems still to be missing. We try to fill…