L
Leela
Member
Hi all
I'm struggling through Ch 7. I'm struggling a little to see how much detail to go into and where to just accept the statements made.
Some particular questions that I have are given below. Sorry it's quite a long list. 6-8 are the ones I'm most concerned/confused about.
1. What are the benefits of capital allocation for reinsurance planning (from SA qu 7.2)?
Is it that it allows us to see where reinsurance is most effective by allowing us to see how the capital for diff LoB are impacted by diff programmes?
2. What are the benefits of capital allocation for investment strategy (from SA qu 7.2).
Is it that it allows us to see where asset allocations are most effective by allowing us to see how the capital for diff LoB are impacted by diff allocations?
3. Why is linear homogeneity a desirable risk characteristic given it ignores the diversification benefit for larger lines of business?
I have seen these characteristics given for asset portfolios (where this axiom makes sense) but don't understand why this one applies to GI liability portfolio.
4. p. 15 EPD def'n
"This is a variant of the above...set as the company's surplus capital" should this be "available capital"? Otherwise the non core reading text below is inconsistent. It seems to me it should be available as beyond this there is a default risk for the policyholder.
5. Mean loss transformed risk measure p. 16
Transformed loss differenced from the original mean loss to give the risk measure. Would this not be negative?
6. It's not immediately obvious to me why the proportional method violates diversification benefit principle.
Is it because there is no guarantee that a low correlation portfolio gets a lower charge this way than if it were considered separately.
Are we able to construct examples under this method where the principle is violated?
Is there a symmetry between this and the marginal method where uncorrelated portfolios are overcharged and therefore violate the diversification principle.
7. p. 24
“The game theory allocation is additive and coherent but only under additional conditions that prevent the risk measure recognising diversification effects.”
My understanding was that to be coherent it needs to recognise diversification? Both the risk measure and the allocation? Do the mean in this case the allocations just add so there is no actual diversification?
I'm just confused about this statement in general.
8. p. 25 Equalise relative risk
A-> If R(X) is the chosen risk measure and E(X) an exposure measure, we allocate capital such that R(X)/E(X) is the same for all LoB.
B-> Allocate capital until the selected risk measure is equalised relative to the expected losses across the whole business.
I understand A not B. I don't see how they are the same. Is A a meaningful def'n here where the risk measure is not the EPD?
Does B make more sense if the word expected is removed.
I'm just not clear what the method is here.
9. Co measures
I understand Co-VaR, Co-TVaR and Co-XTVaR.
Should covariance be like the more conventional def'n of covariance
E[(X – mu_i) (X – mu)]?
I'm don't understand how the Co-EPD would be calculated, or the reasoning behind its formulation. Any ideas on how it works in practice.
I'm struggling through Ch 7. I'm struggling a little to see how much detail to go into and where to just accept the statements made.
Some particular questions that I have are given below. Sorry it's quite a long list. 6-8 are the ones I'm most concerned/confused about.
1. What are the benefits of capital allocation for reinsurance planning (from SA qu 7.2)?
Is it that it allows us to see where reinsurance is most effective by allowing us to see how the capital for diff LoB are impacted by diff programmes?
2. What are the benefits of capital allocation for investment strategy (from SA qu 7.2).
Is it that it allows us to see where asset allocations are most effective by allowing us to see how the capital for diff LoB are impacted by diff allocations?
3. Why is linear homogeneity a desirable risk characteristic given it ignores the diversification benefit for larger lines of business?
I have seen these characteristics given for asset portfolios (where this axiom makes sense) but don't understand why this one applies to GI liability portfolio.
4. p. 15 EPD def'n
"This is a variant of the above...set as the company's surplus capital" should this be "available capital"? Otherwise the non core reading text below is inconsistent. It seems to me it should be available as beyond this there is a default risk for the policyholder.
5. Mean loss transformed risk measure p. 16
Transformed loss differenced from the original mean loss to give the risk measure. Would this not be negative?
6. It's not immediately obvious to me why the proportional method violates diversification benefit principle.
Is it because there is no guarantee that a low correlation portfolio gets a lower charge this way than if it were considered separately.
Are we able to construct examples under this method where the principle is violated?
Is there a symmetry between this and the marginal method where uncorrelated portfolios are overcharged and therefore violate the diversification principle.
7. p. 24
“The game theory allocation is additive and coherent but only under additional conditions that prevent the risk measure recognising diversification effects.”
My understanding was that to be coherent it needs to recognise diversification? Both the risk measure and the allocation? Do the mean in this case the allocations just add so there is no actual diversification?
I'm just confused about this statement in general.
8. p. 25 Equalise relative risk
A-> If R(X) is the chosen risk measure and E(X) an exposure measure, we allocate capital such that R(X)/E(X) is the same for all LoB.
B-> Allocate capital until the selected risk measure is equalised relative to the expected losses across the whole business.
I understand A not B. I don't see how they are the same. Is A a meaningful def'n here where the risk measure is not the EPD?
Does B make more sense if the word expected is removed.
I'm just not clear what the method is here.
9. Co measures
I understand Co-VaR, Co-TVaR and Co-XTVaR.
Should covariance be like the more conventional def'n of covariance
E[(X – mu_i) (X – mu)]?
I'm don't understand how the Co-EPD would be calculated, or the reasoning behind its formulation. Any ideas on how it works in practice.