This talk discusses and demonstrates, using real data, the capital management of all long tail lines of business. The data are extracted from A.M.Best Schedule P 2006 and includes Berkshire Hathaway, The Hartford, SwissRe and others.
We address the three types of correlations, process correlation, parameter correlation and reserve distribution correlation and see how they can help us determine if two LOBs have common drivers.
The design of a composite model for each company that measures the volatility in each LOB and the correlation structure is described. No two companies are the same in respect of volatility, correlations and calendar year payment streams.
We compare companies’ risk capital allocation for reserve risk, underwriting risk and combined risk. Risk capital, derived from either VaR or T-VaR is allocated to LOBs and calendar years and the allocation is different for each company.