Holistic principle for risk aggregation and capital allocation: an extension to Solvency II standard

A novel holistic principle for risk aggregation and capital allocation has recently been proposed in [1], to remedy the issues of lack of consistency, negligence of cost of capital, and disentanglement of allocated capitals from standalone capitals in the state-of-the-art two steps procedure. Astonishingly, the proposed holistic principle provides a natural structural relationship among standalone capital, aggregate capital, allocated capital, and diversification benefit, which is consistent with the current market practice of allocating diversified capitals. However, for parsimonious reasoning, [1] only studies a two-level corporate hierarchy model. This project aims to extend the results in [1] to the Solvency II standard, which involves a multi-level corporate hierarchy model; see, for example, [2].


[1] Chong, W. F., Feng, R., and Jin, L. (2019). Holistic principle for risk aggregation and capital allocation. [The manuscript is available upon request.]
[2] Filipovic, D. (2009). Multi-level risk aggregation, ASTIN Bulletin: The Journal of the International Actuarial Association 39(2), 565-575.

Students: Ruiqi Liu, Yilin Zhu

Supervisor: Alfred Chong