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Alarm System for Insurance Companies: A Strategy for Capital Allocation

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  • Shubhabrata Das
  • Marie Kratz

Abstract

One possible way of risk management for an insurance company is to develop an early and appropriate alarm system before the possible ruin. The ruin is defined through the status of the aggregate risk process, which in turn is determined by premium accumulation as well as claim settlement outgo for the insurance company. The main purpose of this work is to design an effective alarm system, i.e. to define alarm times and to recommend augmentation of capital of suitable magnitude at those points to prevent or reduce the chance of ruin. To draw a fair measure of effectiveness of alarm system, comparison is drawn between an alarm system, with capital being added at the sound of every alarm, and the corresponding system without any alarm, but an equivalently higher initial capital. Analytical results are obtained in general setup and this is backed up by simulated performances with various types of loss severity distributions. This provides a strategy for suitably spreading out the capital and yet addressing survivability concerns at satisfactory level.

Suggested Citation

  • Shubhabrata Das & Marie Kratz, 2010. "Alarm System for Insurance Companies: A Strategy for Capital Allocation," Papers 1006.5473, arXiv.org.
    • Handle: RePEc:arx:papers:1006.5473
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    References listed on IDEAS

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    1. Jean-Luc Besson & Michel M Dacorogna & Paolo de Martin & Michael Kastenholz & Michael Moller, 2009. "How Much Capital Does a Reinsurance Need?," The Geneva Papers on Risk and Insurance - Issues and Practice, Palgrave Macmillan;The Geneva Association, vol. 34(2), pages 159-174, April.
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    1. Das, S. & Kratz, M., 2012. "Alarm system for insurance companies: A strategy for capital allocation," Insurance: Mathematics and Economics, Elsevier, vol. 51(1), pages 53-65.
    2. Marie Kratz & Shubhabrata Das, 2010. "On Devising Various Alarm Systems for Insurance Companies," Post-Print hal-00572546, HAL.
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    4. Das, Shubhabrata & Kratz, Marie, 2010. "On Devising Various Alarm Systems for Insurance Companies," ESSEC Working Papers DR 10008, ESSEC Research Center, ESSEC Business School.

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