Capital Allocation for Insurance Companies - What Good is it?
Journal
The Journal of Risk and Insurance
ISSN
0022-4367
Type
journal article
Date Issued
2007-03-01
Author(s)
Abstract
In their 2001 Journal of Risk and Insurance article, Stewart C. Myers and James A. Read Jr. propose to use a specific capital allocation method for pricing insurance contracts. We show that in their model framework no capital allocation to lines of business is needed for pricing insurance contracts. In the case of having to cover frictional costs, the suggested allocation method may even lead to inappropriate insurance prices. Beside the purpose of pricing insurance contracts, capital allocation methods proposed in the literature and used in insurance practice are typically intended to help derive capital budgeting decisions in insurance companies, such as expanding or contracting lines of business. We also show that net present value analyses provide better capital budgeting decisions than capital allocation in general.
Language
English
HSG Classification
contribution to scientific community
Refereed
Yes
Publisher
Blackwell Publishing
Publisher place
Malden, Mass.
Volume
74
Number
2
Start page
301
End page
317
Pages
17
Subject(s)
Division(s)
Eprints ID
20888