Capital Allocation Methods—Policyholder vs. Shareholder Perspectives

A key component of actuarial pricing involves the allocation of the required risk load down to the individual policy level. This allocation generally depends on a corporate risk measure. However, an often unanswered or even unaddressed question involves the perspective of the risk measure; specifically, shareholders and policyholders naturally have very different inherent viewpoints of the risk distribution. This paper discusses the implications of these differing risk viewpoints on policy pricing. In addition, the paper describes the problem within the context of the theory of financial economics, and concludes with some recommendations and opinions on the current state of risk allocation in the actuarial profession.