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Can a Coherent Risk Measure Be Too Subadditive?

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  • J. Dhaene
  • R. J. A. Laeven
  • S. Vanduffel
  • G. Darkiewicz
  • M. J. Goovaerts

Abstract

We consider the problem of determining appropriate solvency capital requirements for an insurance company or a financial institution. We demonstrate that the subadditivity condition that is often imposed on solvency capital principles can lead to the undesirable situation where the shortfall risk increases by a merger. We propose to complement the subadditivity condition by a regulator's condition. We find that for an explicitly specified confidence level, the Value‐at‐Risk satisfies the regulator's condition and is the “most efficient” capital requirement in the sense that it minimizes some reasonable cost function. Within the class of concave distortion risk measures, of which the elements, in contrast to the Value‐at‐Risk, exhibit the subadditivity property, we find that, again for an explicitly specified confidence level, the Tail‐Value‐at‐Risk is the optimal capital requirement satisfying the regulator's condition.

Suggested Citation

  • J. Dhaene & R. J. A. Laeven & S. Vanduffel & G. Darkiewicz & M. J. Goovaerts, 2008. "Can a Coherent Risk Measure Be Too Subadditive?," Journal of Risk & Insurance, The American Risk and Insurance Association, vol. 75(2), pages 365-386, June.
    • Handle: RePEc:bla:jrinsu:v:75:y:2008:i:2:p:365-386
    DOI: 10.1111/j.1539-6975.2008.00264.x
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    References listed on IDEAS

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    1. Casper G. de Vries & Gennady Samorodnitsky & Bjørn N. Jorgensen & Sarma Mandira & Jon Danielsson, 2005. "Subadditivity Re–Examined: the Case for Value-at-Risk," FMG Discussion Papers dp549, Financial Markets Group.
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