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Risks 2017, 5(2), 31; doi:10.3390/risks5020031

Actuarial Geometry

St. John’s University, Peter J. Tobin College of Business, 101 Astor Place, New York, NY 10003, USA
Academic Editor: Albert Cohen
Received: 12 April 2017 / Revised: 16 May 2017 / Accepted: 2 June 2017 / Published: 16 June 2017
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Abstract

The literature on capital allocation is biased towards an asset modeling framework rather than an actuarial framework. The asset modeling framework leads to the proliferation of inappropriate assumptions about the effect of insurance line of business growth on aggregate loss distributions. This paper explains why an actuarial analog of the asset volume/return model should be based on a Lévy process. It discusses the impact of different loss models on marginal capital allocations. It shows that Lévy process-based models provide a better fit to the US statutory accounting data, and identifies how parameter risk scales with volume and increases with time. Finally, it shows the data suggest a surprising result regarding the form of insurance parameter risk. View Full-Text
Keywords: capital; capital allocation; capital determination; diversification; homogeneous; insurance; insurance pricing; Lévy process; parameter risk; risk measure; risk theory capital; capital allocation; capital determination; diversification; homogeneous; insurance; insurance pricing; Lévy process; parameter risk; risk measure; risk theory
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This is an open access article distributed under the Creative Commons Attribution License which permits unrestricted use, distribution, and reproduction in any medium, provided the original work is properly cited. (CC BY 4.0).

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Mildenhall, S.J. Actuarial Geometry. Risks 2017, 5, 31.

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