This session will explain how to load loss costs for risk. It will compare traditional methods (constant ROE, endless debate about allocation) with distortion, or spectral, risk measure approaches (variable cost of capital, but unique allocation). It will apply the theory to a notional portfolio. It will highlight that diversification, relative tail thickness by line, and limited liability interact in subtle ways to produce the final answer.
Distortion methods will be shown to correspond directly to differential costs of capital across a realistic capital structure. The theory will be applied to reinsurance purchasing strategy and retention setting.