Coherent Measures of Risk - Casualty Actuarial Society.pptVIP

Coherent Measures of Risk CAS Seminar on Dynamic Financial Analysis June 8, 2001 Glenn Meyers Insurance Services Office, Inc. New Papers “Coherent Measures of Risk” Philippe Artzner, Freddy Delbaen, Jean-Marc Eber and David Heath, Math. Finance 9 (1999), no. 3, 203-228 http://www.math.ethz.ch/~delbaen/ftp/preprints/CoherentMF.pdf Coherent Measures of Risk - An Explanation for the Lay Actuary Glenn Meyers /pubs/forum/00sforum/meyers/Coherent%20Measures%20of%20Risk.pdf A List of Loss Scenarios Subadditivity Monotonicity Positive Homogeneity Translation Invariance Axioms for Coherent Measures of RiskSatisfied by our example Subadditivity – For all random losses X and Y, r(X+Y) ? r(X)+r(Y) Monotonicity – If X ? Y for each scenario, then r(X) ? r(Y) Positive Homogeneity – For all l ? 0 and random loss X r(lX) = lr(Y) Translation Invariance – For all random losses X and constants a r(X+a) = r(X) + a Value at Risk/Probability of Ruinis not coherent - violates subadditivity Standard Deviation Principle is not coherent - violates monotonicity The Representation Theorem Probability Measures?The Easiest Example Let A= {Ai} be the set of one element subsets of W. Let Xi be the loss for ai. Probability Measures?The Next Easiest Example Let A= {Ai} be the set of n element subsets of W. Let Xw be the loss for w?W Proposed Measure of RiskTail Value at Risk TVaR and Expected Policyholder Deficit Determine the Amount of Capital Decide on a measure of risk Tail Value at Risk Average of the top 1% of aggregate losses Note that the measure of risk is applied to the insurer’s entire portfolio of losses. Capital determined by the risk measure. C = r(X) - E[X] Step 2Allocate Capital How are you going to use allocated capital? Use it to set profitability targets. Better Off? Let P = Profit and C = Capital. Then the insurer is better off by adding a line/policy if: OK - Set targets so that marginal return on capital equal to insurer return on Capital? If risk measure is su