Actuarial Expertise
Research Update

Costs of Holding Capital Project Extension and Expert Review Update

The Committee on Theory of Risk (COTOR) issued an RFP in 2012 for a report to advance understanding of the concepts and practical methods of calculating the capital costs appropriate for lines and sublines as presented in the Management Summary and Thematic Category of the research, “Allocation of Capital.” Researchers George Zanjani and Daniel Bauer, from Georgia State University, completed that initial report titled, “The Allocation of Costs of Holding Capital,” in late 2014.

Upon completion of the primary report, COTOR determined that subsequent research was needed to take the findings further. COTOR contracted with Zanjani and Bauer again to continue work on their report, with the goal of generating comparable results for more conventional property and casualty lines. In addition to securing suitable data and adjusting the parameters to corresponding data, Zanjani and Bauer will explore extensions of the theory. The final report, “An Extension/Adaptation of the Project on the Allocation of Costs of Holding Capital,” is expected to be completed in 2015.

In view of the extensive theoretical development in the project paper and the extensive computer generated examples of allocation methods in MATLAB, COTOR also recommended having outside experts under a contract with the CAS to perform a detailed review of those two parts of the project report. (MATLAB or matrix laboratory is a multi-paradigm numerical computing environment and fourth-generation programming language.) Researcher Kailan Shang was contracted to undertake this expert review. Shang completed the review and submitted it to the primary researchers, Zanjani and Bauer, and to COTOR early in 2015.