Asset Allocation to Optimise Life Insurance Annuity Firm Economic Capital and Risk Adjusted Performance

Tapadar, Pradip (2009) Asset Allocation to Optimise Life Insurance Annuity Firm Economic Capital and Risk Adjusted Performance. In: Royal Statistical Society Conference, 7-11 September 2009, Edinburgh, UK. (The full text of this publication is not currently available from this repository. You may be able to access a copy if URLs are provided)

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With the advent of new risk-based regulations for financial services firms, specifically Basel 2 for banks and Solvency 2 for insurers, there is now a heightened focus on the practical implementation of quantitative risk management techniques for firms operating within the financial services industry. In particular, financial services firms are now expected to self assess and quantify the amount of capital that they need, to cover the risks they are running. This self assessed quantum of capital is commonly termed risk, or economic, capital. This talk is concerned with two important questions: Question 1: How should a capital constrained firm allocate its assets to minimise its economic capital requirement? Question 2: How should a firm allocate its assets to optimise its risk adjusted performance? The talk will focus on the impact that asset allocation has on the economic capital and the risk adjusted performance of financial services firms. A stochastic approach, using graphical models, is used in conjunction with a life insurance annuity firm as an illustrative example. It is shown that traditional solvency-driven deterministic approaches to financial services firm asset allocation can yield suboptimal results in terms of minimising economic capital or maximising risk adjusted performance. Our results challenge the conventional wisdom that the assets backing life insurance annuities and financial services firm capital should be invested in low risk, bond type, assets. Implications for firms, customers, capital providers and regulators are also considered.

Item Type: Conference or workshop item (Lecture)
Subjects: Q Science > QA Mathematics (inc Computing science)
Divisions: Faculties > Science Technology and Medical Studies > School of Mathematics Statistics and Actuarial Science > Actuarial Science
Depositing User: Pradip Tapadar
Date Deposited: 23 Nov 2011 10:57
Last Modified: 25 Nov 2011 09:23
Resource URI: (The current URI for this page, for reference purposes)
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