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Insurance Risk, Risk Measures, and Capital Allocation: Navigating a Copernican Shift

Author

Listed:
  • Michael R. Powers

    (School of Economics and Management, Tsinghua University, Beijing 100084, China
    Department of Risk, Insurance and Healthcare Management, Fox School of Business, Temple University, Philadelphia, Pennsylvania 19122)

  • George Zanjani

    (Department of Risk Management and Insurance, Robinson College of Business, Georgia State University, Atlanta, Georgia 30302)

Abstract

We pursue two interrelated lines of thought. The first is a conceptual arc from (a) consideration of the unique characteristics of insurance risk, to (b) the quantification of this risk through risk measures, to (c) the application of these concepts to problems of allocating capital within an insurance company. The second is the identification and analysis of a dichotomy between prescriptive and descriptive approaches that appears in the study of each of the three previous components. In this way, we demonstrate the need for a Copernican shift from prescriptive solutions emphasizing the intrinsic characteristics of insurance loss random variables, to descriptive solutions accounting for both the properties of loss distributions and the economic and regulatory realities faced by insurance companies.

Suggested Citation

  • Michael R. Powers & George Zanjani, 2013. "Insurance Risk, Risk Measures, and Capital Allocation: Navigating a Copernican Shift," Annual Review of Financial Economics, Annual Reviews, vol. 5(1), pages 201-223, November.
    • Handle: RePEc:anr:refeco:v:5:y:2013:p:201-223
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    File URL: http://www.annualreviews.org/doi/abs/10.1146/annurev-financial-110112-120955
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    Citations

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    Cited by:

    1. Gao Siwei & Powers Michael R., 2017. "Bounded, Sigmoid Utility for Insurance Applications," Asia-Pacific Journal of Risk and Insurance, De Gruyter, vol. 11(1), pages 1-19, January.

    More about this item

    Keywords

    total losses; inhomogeneity; heavy tails; Euler gradient method; Aumann-Shapley value; profit maximization;
    All these keywords.

    JEL classification:

    • G22 - Financial Economics - - Financial Institutions and Services - - - Insurance; Insurance Companies; Actuarial Studies
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • G38 - Financial Economics - - Corporate Finance and Governance - - - Government Policy and Regulation
    • C7 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory

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