Effects of Traditional Reinsurance on Demographic Risk Under the Solvency II Framework

Emily Bianchessi (), Gian Paolo Clemente, Francesco Della Corte and Nino Savelli
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Emily Bianchessi: Department of Mathematics for Economic, Financial and Actuarial Sciences, Università Cattolica del Sacro Cuore, Largo Gemelli 1, 20123 Milan, Italy
Gian Paolo Clemente: Department of Mathematics for Economic, Financial and Actuarial Sciences, Università Cattolica del Sacro Cuore, Largo Gemelli 1, 20123 Milan, Italy
Francesco Della Corte: Department of Mathematics for Economic, Financial and Actuarial Sciences, Università Cattolica del Sacro Cuore, Largo Gemelli 1, 20123 Milan, Italy
Nino Savelli: Department of Mathematics for Economic, Financial and Actuarial Sciences, Università Cattolica del Sacro Cuore, Largo Gemelli 1, 20123 Milan, Italy

Risks, 2025, vol. 13, issue 10, 1-32

Abstract: This paper investigates the role of proportional reinsurance as a practical and flexible tool for managing demographic risk in life insurance, with a focus on its impact on both the Solvency Capital Requirement (SCR) and expected profitability. While much of the existing literature focuses on mortality modeling or longevity-linked reinsurance instruments, this paper proposes a novel framework for analyzing traditional proportional reinsurance structures within the Solvency II market-consistent valuation environment. The framework integrates proportional reinsurance into the valuation of liabilities and the calculation of Solvency Capital Requirement, beginning with an outline of cash flow structures and their valuation under Solvency II principles. A key contribution is the introduction and decomposition of the net of reinsurance Claims Development Result (CDR), which allows us to assess the dual impact of reinsurance on risk mitigation and profit transfer. Through numerical analysis, we show how proportional reinsurance can effectively reduce capital requirements while quantifying the trade-off in expected profit transferred to the reinsurance company, with insights into how different reinsurance treaties affect capital efficiency and profitability.

Keywords: demographic risk; cohort approach; Solvency II; market-consistent valuation; reinsurance strategies; risk theory (search for similar items in EconPapers)
JEL-codes: C G0 G1 G2 G3 K2 M2 M4 (search for similar items in EconPapers)
Date: 2025
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