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

DISCUSSION OF A PAPER PRESENTED AT CAS SPRING2005 MEETINGRISKINESS LEVERAGE MODELSRODNEY KREPSDISCUSSION BY ROBERT A. BEARAbstractRodney Kreps has written a paper that is a majorcontribution to the CAS literature on the central topicsof risk load and capital allocation for profitability measurement,which is a core component of an enterpriserisk management system. He has given us a rich classof mathematical models that satisfy two very desirableproperties for a risk-load or surplus-allocation method:They can allocate risk down to any desired level of definitionand they satisfy the additivity property. Tail Valueat Risk and Excess Tail Value at Risk reasonably satisfythe properties that management would likely wantof such a model, while still satisfying the properties of ariskiness leverage model and the properties of coherentmeasures of risk.Donald Mango’s ground-breaking work in developingthe concepts of insurance capital as a shared assetand Economic Value Added [2] are discussed. A RiskReturn on Capital model is suggested as an integrationof the approaches presented by Kreps and Mango. Thismethod measures returns on capital after reflecting themean rental cost of rating agency capital. Reinsurancealternatives are compared using both the Return on RiskAdjusted Capital approach presented by Kreps and thisintegrated approach.61