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

70 RISKINESS LEVERAGE MODELSprivate entities (e.g., hotels, golf courses, beach houses). The accessto and use of the assets is controlled and regulated by theirowners; this control and regulation is essential to preserving theasset for future use. The aggregation risk is a common characteristicof shared asset usage, since shared assets typically havemore members who could potentially use the asset than the assetcan safely bear.He differentiates between consumptive and non-consumptiveuse of an asset. A consumptive use involves the transfer of aportion or share of the asset from the communal asset to an individual,such as in the reservoir water usage and fishery examples.Non-consumptive use involves temporary, limited transferof control that is intended to be non-depletive in that it is leftintact for subsequent users. Examples of non-consumptive useinclude boating on a reservoir, playing on a golf course or rentinga car or hotel room.While shared assets are typically used in only one of the twomanners, some shared assets can be used in either a consumptiveor non-consumptive manner, depending on the situation. Mangogives the example of renting a hotel room. While the intendeduse is benign occupancy (non-consumptive), there is the risk thata guest may fall asleep with a lit cigarette and burn down a wingof the hotel (clearly consumptive).Mango notes that rating agencies use different approaches inestablishing ratings, but the key variable is the capital-adequacyratio (CAR) that is the ratio of actual capital to required capital.Typically, the rating agency formulas generate required capitalfrom three sources: premiums, reserves, and assets. Current yearunderwriting activity will generate required premium capital. Asthat premium ages, reserves will be established that will generatethe required reserve capital. As the reserves are run off,the amount of required reserve capital will diminish and eventuallyreach zero when all claims are settled. As there are usuallyminimum CAR levels associated with each rating level, Mangopoints out that a given amount of actual capital corresponds to