Abstract
We address some key issues related to risk and capital allocation in insurance companies. We argue that the Froot-Stein approach to risk is relevant to a number of important problems in the daily management of an insurance portfolio and that – taken to its consequence – this approach will lead to a close cooperation between actuarial and financial departments with a particular view to the ability of the Actuary to separate financial risk from insurance risk and the ability of the finance department to hedge the right amount of their complicated financial risk at a good price. We also introduce a new way of combining capital allocation and pricing of insurance policies. Through a performance measure of return on capital, we suggest a way of evaluating the price of capital for a single policy, that this money is held as a reserve and that this reserve should run off in such a way that old underwriting does not harm the performance of any given business line.
| Original language | English |
|---|---|
| Journal | Belgian Actuarial Bulletin |
| Volume | 9 |
| Pages (from-to) | 1-7 |
| Number of pages | 7 |
| ISSN | 1784-5742 |
| Publication status | Published - 2010 |