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How Much Capital Does a Reinsurance Need?

Author

Listed:
  • Jean-Luc Besson

    (SCOR, General Guisan, Quai26, Zurich 8022, Switzerland)

  • Michel M Dacorogna

    (SCOR, General Guisan, Quai26, Zurich 8022, Switzerland)

  • Paolo de Martin

    (SCOR, General Guisan, Quai26, Zurich 8022, Switzerland)

  • Michael Kastenholz

    (SCOR, General Guisan, Quai26, Zurich 8022, Switzerland)

  • Michael Moller

    (SCOR, General Guisan, Quai26, Zurich 8022, Switzerland)

Abstract

A modern reinsurance company needs to manage its capital efficiently. The problem is that there are many views on capital, depending on the various positions of the stakeholders of the company involved. In this paper, we present a consistent way of defining capital and of managing it, taking into account the view of all stakeholders. We answer the question of how much capital is required by the business, and introduce the notion of buffer capital. This is used to reduce the likelihood of the company having to call too often on its shareholders to refurbish its capital. We show how this concept relates to the setting of return on equity objectives for the company. Capital allocation is the driver for measuring the economic performance of a business. The fixing of limits relating to capital consumption is linked to capital allocation because it preserves the diversification of the book. We advocate the use of the internal model to determine all of these parameters, and to set the stage for good enterprise risk management within the company. The Geneva Papers (2009) 34, 159–174. doi:10.1057/gpp.2009.8

Suggested Citation

  • Jean-Luc Besson & Michel M Dacorogna & Paolo de Martin & Michael Kastenholz & Michael Moller, 2009. "How Much Capital Does a Reinsurance Need?," The Geneva Papers on Risk and Insurance - Issues and Practice, Palgrave Macmillan;The Geneva Association, vol. 34(2), pages 159-174, April.
  • Handle: RePEc:pal:gpprii:v:34:y:2009:i:2:p:159-174
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    Citations

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    Cited by:

    1. Das, Shubhabrata & Kratz, Marie, 2010. "On Devising Various Alarm Systems for Insurance Companies," ESSEC Working Papers DR 10008, ESSEC Research Center, ESSEC Business School.
    2. Marie Kratz & Shubhabrata Das, 2010. "On Devising Various Alarm Systems for Insurance Companies," Post-Print hal-00572546, HAL.
    3. Das, S. & Kratz, M., 2012. "Alarm system for insurance companies: A strategy for capital allocation," Insurance: Mathematics and Economics, Elsevier, vol. 51(1), pages 53-65.
    4. Shubhabrata Das & Marie Kratz, 2010. "Alarm System for Insurance Companies: A Strategy for Capital Allocation," Papers 1006.5473, arXiv.org.
    5. Krzysztof Burnecki & Mario Nicol'o Giuricich & Zbigniew Palmowski, 2018. "Valuation of contingent convertible catastrophe bonds - the case for equity conversion," Papers 1804.07997, arXiv.org.

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