RAROC Economic Capital Allocation Method And Revision Of The P&C Insurance Companies

As special financial institutions, reasonable economic capital allocation of P&C insurance companies is not only important guarantee of P&C insurance companies security, but also the basis of improving company value. As a result, how to allocate economic capital is concerned for insurers. This paper researches the principle of allocate economic capital. Depending on limitation of the previous economic capital allocation, we take Risk-Adjusted Return on Capital (RAROC) as the base. Because of coherent measures of risk and economic capital allocation, we take the TailVaR into economic capital of every line. At the same time, we correct the RAROC model through principal-agent problems between shareholders and managers of P&C insurance companies. The meaning of this thesis is to provide some applicable theoretical foundations to construct primary framework of economic capital allocation in China. There are four chapters in this dissertation.The thesis begins with the analysis of existing studies, puts forward allocation principle in details, and adopts RAROC as our research method. With reference to the goal of financial management is maximizing the value of shareholders. With reference to economic capital is defined, and two approaches of economic capital allocation are discussed, namely RAROC and TailVaR. An eclectic allocation approach is introduced. TailVaR calculates scale of economic capital, and its allocation is ascertained by RAROC. In the end, the thesis studied how to correct RAROC economic capital allocation method, when we collocated scarcity economic capital to newly added asset yet it existed principal-agent problems between shareholders and managers. We got the quantity of equity capital which insurance company should choose, the optimal risklevel and the expression of RAROC hurdle rate r~* through building the managers' incentive restriction equation and analyzing the target function of maximizingshareholder value. The gained of hurdle rate r~* is an important conclusion of correcting RAROC economic capital allocation.