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Using Cat Models for Optimal Risk Allocation of P&C Liability Portfolios

Using Cat Models for Optimal Risk Allocation of P&C Liability Portfolios This article provides a general introduction to using catastrophe models to optimally manage the risk of a portfolio of Property & Casualty P&C liabilities. There is increasing emphasis on the enterprisewide allocation of risk capacity for all financial intermediaries, e.g. banks, pensions, investment funds, as well as life and P&C insurers. The optionality the skewness, kurtosis, and correlation with asset risk of liability risks contribute substantially to earnings volatility. The severity of lowprobability events, i.e. natural catastrophes e.g. hurricanes, earthquakes, combined with increases in geographic concentrations of wealth can adversely affect the diversification of the liability risk at the portfolio level. Since in both finance and insurance, optimally allocating risk at the portfolio level is generally based on linear combinations of nonlinear risks, finding an optimal allocation is not always tractable. The author describes a wellestablished optimization algorithm and produces a reasonable approximation for an optimal solution. http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png The Journal of Risk Finance Emerald Publishing

Using Cat Models for Optimal Risk Allocation of P&C Liability Portfolios

Zeng, Lixin
The Journal of Risk Finance , Volume 2 (2): 7 – Jan 1, 2001
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References (3)

Publisher
Emerald Publishing
Copyright
Copyright © Emerald Group Publishing Limited
ISSN
1526-5943
DOI
10.1108/eb043459
Publisher site
See Article on Publisher Site

Abstract

This article provides a general introduction to using catastrophe models to optimally manage the risk of a portfolio of Property & Casualty P&C liabilities. There is increasing emphasis on the enterprisewide allocation of risk capacity for all financial intermediaries, e.g. banks, pensions, investment funds, as well as life and P&C insurers. The optionality the skewness, kurtosis, and correlation with asset risk of liability risks contribute substantially to earnings volatility. The severity of lowprobability events, i.e. natural catastrophes e.g. hurricanes, earthquakes, combined with increases in geographic concentrations of wealth can adversely affect the diversification of the liability risk at the portfolio level. Since in both finance and insurance, optimally allocating risk at the portfolio level is generally based on linear combinations of nonlinear risks, finding an optimal allocation is not always tractable. The author describes a wellestablished optimization algorithm and produces a reasonable approximation for an optimal solution.

Journal

The Journal of Risk Finance – Emerald Publishing

Published: Jan 1, 2001

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