A capital allocation based on a solvency exchange option

Joseph H.T. Kim, Mary R. Hardy

Research output: Contribution to journalArticle

13 Citations (Scopus)

Abstract

In this paper we propose a new capital allocation method based on an idea of [Sherris, M., 2006. Solvency, capital allocation and fair rate of return in insurance. J. Risk Insurance 73 (1), 71-96]. The proposed method explicitly accommodates the notion of limited liability of the shareholders. We show how the allocated capital can be decomposed, so that each stakeholder can have a clearer understanding of their contribution. We also challenge the no undercut principle, one of the widely accepted allocation axioms, and assert that this axiom is merely a property that certain allocation methods may or may not meet.

Original languageEnglish
Pages (from-to)357-366
Number of pages10
JournalInsurance: Mathematics and Economics
Volume44
Issue number3
DOIs
Publication statusPublished - 2009 Jun

All Science Journal Classification (ASJC) codes

  • Statistics and Probability
  • Economics and Econometrics
  • Statistics, Probability and Uncertainty

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