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Optimal risk-sharing across a network of insurance companies


Ettlin, Nicolas; Farkas, Walter; Kull, Andreas; Smirnow, Alexander (2020). Optimal risk-sharing across a network of insurance companies. Swiss Finance Institute Research Paper 20-52, University of Zurich.

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 requirements. 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 insurance 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.

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 requirements. 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 insurance 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.

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6 citations in Scopus®

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Additional indexing

Item Type:Working Paper
Communities & Collections:03 Faculty of Economics > Department of Banking and Finance
Dewey Decimal Classification:330 Economics
Scopus Subject Areas:Physical Sciences > Statistics and Probability
Social Sciences & Humanities > Economics and Econometrics
Social Sciences & Humanities > Statistics, Probability and Uncertainty
Scope:Discipline-based scholarship (basic research)
Language:English
Date:2020
Deposited On:15 Dec 2020 12:29
Last Modified:10 Jun 2024 03:32
Series Name:Swiss Finance Institute Research Paper
OA Status:Green
Free access at:Official URL. An embargo period may apply.
Official URL:https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3417016
Related URLs:https://www.zora.uzh.ch/id/eprint/190721/
https://doi.org/10.1016/j.insmatheco.2020.08.002 (Publisher)
Other Identification Number:merlin-id:18049
  • Content: Published Version