A Note on the Myers and Read Capital Allocation Formula

The Myers and Read captial allocation formula is an important new actu- arial result. In this paper, we give an overview of the Myers and Read result, explain its significance to actuaries, and provide a simple proof. Then we explain the assumption the allocation formula makes on the underlying fam- ilies of loss distributions as expected losses by-line vary. Finally we show that this assumption does not hold when insurers grow by writing more risks from a discrete group of insureds—as is typically the case. This failure will severely limit the practical application of the allocation formula.