Optimal Risk-Sharing Across a Network of Insurance Companies

Nicolas Ettlin, Walter Farkas, Andreas Kull and Alexander Smirnow
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Nicolas Ettlin: University of Basel, Actuarial Science, Department of Mathematics and Computer Science
Walter Farkas: University of Zurich - Department of Banking and Finance; Swiss Finance Institute; ETH Zürich
Andreas Kull: University of Basel, Actuarial Science, Department of Mathematics and Computer Science; BerninaRe Ltd.
Alexander Smirnow: University of Zurich - Department of Banking and Finance

No 20-52, Swiss Finance Institute Research Paper Series from Swiss Finance Institute

Abstract: Risk transfer is a key risk and capital management tool for insurance companies. Transferring risk between insurers is used to mitigate risk and manage capital re- quirements. We investigate risk transfer in the context of a network environment of insurers and consider capital costs and capital constraints at the level of individual insurance companies. We demonstrate that the optimisation of profitability across the network can be achieved through risk transfer. Considering only individual in- surance companies, there is no unique optimal solution and, a priori, it is not clear which solutions are fair. However, from a network perspective, we derive a unique fair solution in the sense of cooperative game theory. Implications for systemic risk are briefly discussed.

Keywords: risk transfer; risk-based capital; reinsurance; return optimisation; conditional expected shortfall (search for similar items in EconPapers)
JEL-codes: C57 C71 D85 G13 G22 (search for similar items in EconPapers)
Pages: 64 pages
Date: 2020-06
New Economics Papers: this item is included in nep-ias, nep-net and nep-rmg
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Citations: View citations in EconPapers (3)

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Persistent link: https://EconPapers.repec.org/RePEc:chf:rpseri:rp2052

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