Value adjustments and dynamic hedging of reinsurance counterparty risk

Claudia Ceci, Katia Colaneri, R\"diger Frey and Verena K\"ock

Papers from arXiv.org

Abstract: Reinsurance counterparty credit risk (RCCR) is the risk of a loss arising from the fact that a reinsurance company is unable to fulfill her contractual obligations towards the ceding insurer. RCCR is an important risk category for insurance companies which, so far, has been addressed mostly via qualitative approaches. In this paper we therefore study value adjustments and dynamic hedging for RCCR. We propose a novel model that accounts for contagion effects between the default of the reinsurer and the price of the reinsurance contract. We characterize the value adjustment in a reinsurance contract via a partial integro-differential equation (PIDE) and derive the hedging strategies using a quadratic method. The paper closes with a simulation study which shows that dynamic hedging strategies have the potential to significantly reduce RCCR.

Date: 2019-09
New Economics Papers: this item is included in nep-ias and nep-rmg
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