Can a Coherent Risk Measure Be Too Subadditive?
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 in...
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| Veröffentlicht in: | The Journal of risk and insurance 2008-06, Vol.75 (2), p.365-386 |
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| container_title | The Journal of risk and insurance |
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| creator | Dhaene, J. Laeven, R. J. A. Vanduffel, S. Darkiewicz, G. Goovaerts, M. J. |
| description | 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. |
| doi_str_mv | 10.1111/j.1539-6975.2008.00264.x |
| format | Article |
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| ispartof | The Journal of risk and insurance, 2008-06, Vol.75 (2), p.365-386 |
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| language | eng |
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| source | RePEc; EBSCOhost Business Source Complete; Access via Wiley Online Library; JSTOR Archive Collection A-Z Listing |
| subjects | Analysis Budget deficits Capital costs Capital market Capital requirements Cost functions Financial portfolios Insurance industry Insurance premiums Insurance regulation Investment risk Management Return on capital Risk management Solvency |
| title | Can a Coherent Risk Measure Be Too Subadditive? |
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