Analysis and comparison of capital allocation techniques in an insurance context
Independent thesis Advanced level (degree of Master (Two Years)), 20 credits / 30 HE creditsStudent thesisAlternative title
Analysoch jämförelse av kapitalallokeringstekniker i försäkring (Swedish)
Companiesissuing insurance cover, in return for insurance premiums, face the payments ofclaims occurring according to a loss distribution. Hence, capital must be heldby the companies so that they can guarantee the fulfilment of the claims ofeach line of insurance. The increased incidence of insurance insolvencymotivates the birth of new legislations as the European Solvency II Directive.Companies have to determine the required amount of capital and the optimalcapital allocation across the different lines of insurance in order to keep therisk of insolvency at an adequate level. The capital allocation problem may betreated in different ways, starting from the insurance company balance sheet.Here, the running process and efficiency of four methods are evaluated andcompared so as to point out the characteristics of each of the methods. TheValue-at-Risk technique is straightforward and can be easily generated for anyloss distribution. The insolvency put option principle is easily implementableand is sensitive to the degree of default. The capital asset pricing model isone of the oldest reliable methods and still provides very helpful intermediateresults. The Myers and Read marginal capital allocation approach encouragesdiversification and introduces the concept of default value. Applications ofthe four methods to some fictive and real insurance companies are provided. Thethesis further analyses the sensitivity of those methods to changes in the economiccontext and comments how insurance companies can anticipate those changes.
Place, publisher, year, edition, pages
2013. , 66 p.
Insurer balance sheet, Capital allocation, Surplus, Diversification, Value-at-Risk, Option pricing theory, Capital Asset Pricing Model, Marginal capital allocation, Default value.
Probability Theory and Statistics
IdentifiersURN: urn:nbn:se:kth:diva-122863OAI: oai:DiVA.org:kth-122863DiVA: diva2:623694
Subject / course
Master of Science - Mathematics
UppsokPhysics, Chemistry, Mathematics
Hult, Henrik, Lektor
Hult, Henrik, Lektor