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A capital allocation based on a solvency exchange option. (English) Zbl 1162.91380

Summary: We propose a new capital allocation method based on an idea of M. Sherris [Solvency, capital allocation and fair rate of return in insurance. J. Risk Insurance 73, No. 1, 71–96 (2006)]. The proposed method explicitly accommodates the notion of limited liability of the shareholders. We show how the allocated capital can be decomposed, so that each stakeholder can have a clearer understanding of their contribution. We also challenge the no undercut principle, one of the widely accepted allocation axioms, and assert that this axiom is merely a property that certain allocation methods may or may not meet.

MSC:

91B28 Finance etc. (MSC2000)
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