Risk capital allocation and cooperative pricing of insurance liabilities

The Aumann–Shapley [Values of Non-atomic Games, Princeton University Press, Princeton] value, originating in cooperative game theory, is used for the allocation of risk capital to portfolios of pooled liabilities, as proposed by Denault [Coherent allocation of risk capital, J. Risk 4 (1) (2001) 1]. We obtain an explicit formula for the Aumann–Shapley value, when the risk measure is given by a distortion premium principle [Axiomatic characterisation of insurance prices, Insur. Math. Econ. 21 (2) (1997) 173]. The capital allocated to each instrument or (sub)portfolio is given as its expected value under a change of probability measure. Motivated by Mirman and Tauman [Demand compatible equitable cost sharing prices, Math. Oper. Res. 7 (1) (1982) 40], we discuss the role of Aumann–Shapley prices in an equilibrium context and present a simple numerical example.