I am doing capital modelling in real life. However, I am slightly confused the purpose of the chapter 17. Is it to indicate the possible diversification we need to consider? It talks about the diversification between risks, in the allocation of performance, pricing. But in real capital modelling we surely only consider the diversification between classes of business. I never knew that we need to consider the diversification between risks. but I am working for a small Lloyds syndicate. Maybe it is different in direct business?
Both types of diversification and more are considered in capital modelling. for example: Between catastrophic events within a class of business Between years of account within a class of business Between classes of business themselves Within risk main categories - for example between underwriting risk and reserving risk within insurance risk Between risk categories
jac398 is correct. I also work at Lloyd's and you'll probably find that your capital model includes all of the dependencies mentioned.
