PROCEEDINGS May 15, 16, 17, 18, 2005 - Casualty Actuarial Society

44 RISKINESS LEVERAGE MODELSbad; and that the outcome risk load increases quadratically outto infinity.andThis gives the usualR = ¯SR k = ¯ ZSZ 10dxf(x)(x ¡ ¹) 2 (4.2)0 1nXdF(x k ¡ ¹ k )@x j ¡ ¹ A: (4.3)Note that Equation (4.1) is suggestively framed so that ¯ isa dimensionless constant available for overall scaling. The totalcapital then satisfiesC = ¹ + S, (4.4)and the solution for S = R is proportional to the standard deviationof the total:qS = ¯ Var(X): (4.5)It is perfectly possible, of course, to use some other formulationof the constant, say ¯=¹, which would then give a differentmeasure. Such a measure would imply that the riskiness leveragedoes not depend on the amount of surplus available unless it washidden in the scaling factor ¯.TVAR (Tail Value At Risk)Take the riskiness leveragej=1L(x)= (x ¡ x q)1 ¡ q : (4.6)The value q is a management-chosen percentage; for example,q = 99%. The quantile x q is the value of x where the cumulativedistribution of X, the total, is equal to q.Thatis,F(x q )=q. (x)isthe step function: zero for negative argument and 1 for positive.See Appendix A for mathematical asides on this function.