A Note on the Myers and Read Capital Allocation Formula

Stephen Mildenhall

North American Actuarial Journal, 2004, vol. 8, issue 2, 32-44

Abstract: The Myers and Read capital allocation formula is an important new actuarial result. This paper gives an overview of the Myers and Read result, explains its significance to actuaries, and provides a simple proof. Then it explains the assumption that the allocation formula makes on the underlying families of loss distributions as expected losses by line vary. It shows that this assumption does not hold when insurers grow by writing more risks from a discrete group of insureds—as is typically the case. Finally, it shows that this failure has a material impact on the predicted results in a realistically sized portfolio of property casualty risks which will severely limit the practical application of the Myers and Read allocation formula.

Date: 2004
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DOI: 10.1080/10920277.2004.10596135

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