A capital allocation based on a solvency exchange option Kim, Joseph H.T.; Hardy, Mary R.

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Kim, Joseph H.T. ; Hardy, Mary R.
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Insurance: Mathematics & Economics
Insurance; Mathematics; Business
To link to full-text access for this article, visit this link: http://dx.doi.org/10.1016/j.insmatheco.2008.11.006 Byline: Joseph H.T. Kim, Mary R. Hardy 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. Author Affiliation: Department of Statistics and Actuarial Science, University of Waterloo, Waterloo, ON N2L 3G1, Canada Article History: Received 29 February 2008; Revised 5 November 2008; Accepted 7 November 2008
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