Optimal Economic Capital and Investment Decisions for a Non-Life Insurance Company

This paper develops a theoretical portfolio-based approach to find the economic capital and the optimal assets allocation. The model maximizes a generalized version of the RORAC ratio, under a zero-CVaR constraint. An efficient optimization procedure is proposed. To illustrate the theoretical developments, we give a numerical application and conduct sensitivity analysis. Capital adjustment appears to be more profitable than cash holding. This result holds irrespectively of the choice of the additional capital allocation. The risk magnitude and the initial capital level influence the capital adjustment decisions.
Keywords: Portfolio selection; Risk management; Stochastic fractional programming; Monte Carlo simulation ; Non-life insurance.
JEL: C61; D81; G11; G28; G3