Capital allocation for insurance companies, what good is it?

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<title>The Journal of risk and insurance</title>
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<namePart>Gründl, Helmut</namePart>
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<namePart>Schmeiser, Hato</namePart>
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<abstract>In their 2001 Journal of Risk and Insurance article, Stewart C. Myers and James A. Read Jr. propose to use a specific capital allocation method for pricing insurance contracts. In their model framework no capital allocation to lines of business is needed for pricing insurance contracts. In the case of having to cover frictional costs, the suggested allocation method may even lead to inappropriate insurance prices. Beside the purpose of pricing insurance contracts, capital allocation methods proposed in the literature and used in insurance practice are typically intended to help derive capital budgeting decisions in insurance companies, such as expanding or contracting lines of business. The net present value analyses provide better capital budgeting decisions than capital allocation in general.</abstract>
<note type="statement of responsibility">Helmut Gründl, Hato Schmeiser</note>
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<topic>Capital budgeting</topic>
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<text>Volume 74, nº 2, 2007 ;  p. 301-317</text>
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