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A Note on the Myers and Read Capital Allocation Formula

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  • Stephen Mildenhall

Abstract

The Myers and Read capital allocation formula is an important new actuarial result. This paper gives an overview of the Myers and Read result, explains its significance to actuaries, and provides a simple proof. Then it explains the assumption that the allocation formula makes on the underlying families of loss distributions as expected losses by line vary. It shows that this assumption does not hold when insurers grow by writing more risks from a discrete group of insureds—as is typically the case. Finally, it shows that this failure has a material impact on the predicted results in a realistically sized portfolio of property casualty risks which will severely limit the practical application of the Myers and Read allocation formula.

Suggested Citation

  • Stephen Mildenhall, 2004. "A Note on the Myers and Read Capital Allocation Formula," North American Actuarial Journal, Taylor & Francis Journals, vol. 8(2), pages 32-44.
    • Handle: RePEc:taf:uaajxx:v:8:y:2004:i:2:p:32-44
    DOI: 10.1080/10920277.2004.10596135
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    Cited by:

    1. Seog S. Hun & Shin Sungwhee, 2009. "Comparison between Financial Theory and Cooperative Game Theory in Risk Capital Allocation," Asia-Pacific Journal of Risk and Insurance, De Gruyter, vol. 4(1), pages 1-18, November.
    2. George Zanjani, 2010. "An Economic Approach to Capital Allocation," Journal of Risk & Insurance, The American Risk and Insurance Association, vol. 77(3), pages 523-549, September.
    3. Kull, Andreas, 2009. "Sharing Risk – An Economic Perspective," ASTIN Bulletin, Cambridge University Press, vol. 39(2), pages 591-613, November.
    4. Kim, Joseph H.T. & Hardy, Mary R., 2009. "A capital allocation based on a solvency exchange option," Insurance: Mathematics and Economics, Elsevier, vol. 44(3), pages 357-366, June.
    5. Stephen J. Mildenhall, 2017. "Actuarial Geometry," Risks, MDPI, vol. 5(2), pages 1-44, June.

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