ABSTRACT
Capital allocation problems of insurance and financial institutions arise when a management unit must distribute an amount of resources among different business units. These resources may be the aggregate cost faced by the company, its solvency capital requirement or the total variable economic compensation to be shared across business units, among other examples. This kind of problems are frequent and relevant from an Enterprise Risk Management (ERM) perspective, mainly if the risk that each business unit faces is, somehow, taken into account for the final allocation. Sometimes the capital allocation is merely notional, as pointed out in Dhaene et al. [2012b]. This does not diminish the importance of studying these problems at all. The allocation information may be useful to conduct different business analyses in order to improve the risk management of the company.
