Description: This paper addresses the allocation of solvency capital in multi- line financial businesses. Although this paper is uniformly applicable to financial enterprises of all types, the terminology in the paper is mainly that of insurance. The TailVaR risk measure is extended in a natural way to allocating capital to each of the business units. This method of allocation allocates capital in a way that is invariant over the method of decomposing the enterprise into business units. Analytic results are derived in the case of multivariate Normal risks. The key result of this paper is that the TailVaR-based proportional allocation of total required capital is identical to that based on mean-variance considerations analogous to the CAPM in the case of the multivariate Normaldistribution.

Description: This paper expands upon current capital analysis by introducing a practical approach that considers the objectives of all stakeholders on an insurance company in setting appropriate capital targets. From 2006 Enterprise Risk Management Symposium, M-AS06-1.

Description: This paper provides a novel approach to the valuation of the market value of economic surplus that is stable and immune from “market noise”.

Description: This paper provides a novel approach to the valuation of the market value of economic surplus that is stable and immune from “market noise”.

Description: The author constructed the efficient frontier of new business sales by modeling the embedded value and economic capital against a universe of possible growth rates of the three lines of business in a typical three-year planning horizon. The ERM function can use the efficient frontier of new business to provide a more rigorous analysis of the impact of growth rates on the firm’s overall capital efficiency and value creation, hence forming a feedback loop with the businesses in the planning process to optimize the growth strategy.

Description: The author constructed the efficient frontier of new business sales by modeling the embedded value and economic capital against a universe of possible growth rates of the three lines of business in a typical three-year planning horizon. The ERM function can use the efficient frontier of new business to provide a more rigorous analysis of the impact of growth rates on the firm’s overall capital efficiency and value creation, hence forming a feedback loop with the businesses in the planning process to optimize the growth strategy.

Description: The purpose of this paper is to build a bridge between the traditional methods of looking at financial risk and insurance risk. The paper starts by explaining the concepts behind VaR models of economic capital used in banking. Differences between actuarial and financial views of risk are reviewed and explained. The paper concludes with proposing, developing, and parameterizing a true VaR model of insurance loss reserve risk, which combines several lines of business. From 2006 Enterprise Risk Management Symposium, M-AS06-1.

Description: This paper focuses on the role of holism in enterprise risk management ERM. The performance measure known as market consistent embedded value is discounted for being overly reductionistic. The concept of an economic capital charge or credit is seen here as a potential bridge from the reductionistic to the holistic approach. It shows some promise for achieving holism, but falls short.

Description: Reinsurance reduces the required capital of the primary insurer but increases that of the reinsurer. Capital is costly. All capital costs, including that of the insurer and the reinsurer, are ultimately borne by primary policyholders. Reducing the total capital of insurers and reinsurers brings down the total capital cost and the total primary policy premium. A reinsurance arrangement is considered optimal—if it minimizes the total required capital. This optimal reinsurance is an attracting equilibrium under price competition. Evidence suggests an inverse relationship between the total required capital and the correlation between the losses held by different insurers and reinsurers. Examples are constructed to examine this and other properties of the optimal reinsurance.

Description: Increased attention was paid to regulatory capital with the global financial crisis in 2008. Whilst companies may not have the incentives to retain a large amount of capital in the absence of regulatory capital requirements, overcapitalized entities can have drawback such as its impact on competitiveness. There are other weaknesses in the regulatory capital model such as its limitation in facilitating risk-based decisions as regulatory capital does not necessarily reflect the economic reality and risks an entity faces. Nonetheless, there are ways for regulators and/or companies to handle the weaknesses in the regulatory capital model. For instance, granularity can be introduced in determining regulatory capital. Economic capital can be used to encourage entities to implement risk management controls and facilitate risk-based business decisions (e.g., risk-adjusted performance assessment and risk-based capital allocation). Ultimately, hav ing effective risk management and risk-based capital determination are ways to prevent company failures and bankruptcies.