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Optimal Risk-Sharing Across a Network of Insurance Companies

Author

Listed:
  • 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)

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.

Suggested Citation

  • Nicolas Ettlin & Walter Farkas & Andreas Kull & Alexander Smirnow, 2020. "Optimal Risk-Sharing Across a Network of Insurance Companies," Swiss Finance Institute Research Paper Series 20-52, Swiss Finance Institute.
  • Handle: RePEc:chf:rpseri:rp2052
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    Citations

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    Cited by:

    1. Qiu, Ming & Jin, Zhuo & Li, Shuanming, 2023. "Optimal risk sharing and dividend strategies under default contagion: A semi-analytical approach," Insurance: Mathematics and Economics, Elsevier, vol. 113(C), pages 1-23.
    2. Nataliya Vnukova & Daria Davydenko & Svitlana Achkasova & Olexandr Yagolnitskyi, 2022. "Assessing the Activities of Insurance Companies Due to the Disease of Private Pension," Economic Studies journal, Bulgarian Academy of Sciences - Economic Research Institute, issue 5, pages 179-194.
    3. Wakker, Peter P. & Yang, Jingni, 2021. "Concave/convex weighting and utility functions for risk: A new light on classical theorems," Insurance: Mathematics and Economics, Elsevier, vol. 100(C), pages 429-435.

    More about this item

    Keywords

    risk transfer; risk-based capital; reinsurance; return optimisation; conditional expected shortfall;
    All these keywords.

    JEL classification:

    • G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing
    • G22 - Financial Economics - - Financial Institutions and Services - - - Insurance; Insurance Companies; Actuarial Studies
    • D85 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Network Formation
    • C57 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Econometrics of Games and Auctions
    • C71 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Cooperative Games

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