Concepedia

OPTIMAL CAPITAL AND RISK TRANSFERS FOR GROUP DIVERSIFICATION

Mathematical Finance · 2007 · 61 citations · 14 references

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Concepts

BusinessFinanceInsuranceFinancial EconomicsInsurance EconomicsInsurance RegulationCorporate DiversificationFinancial RiskInsurance CompaniesIntra-group FinancingPortfolio DiversificationRisk SharingDiversification GainsInsurance Capital StructureOptimal Degree Of DiversificationOptimal Risk SharingRisk DiversificationRisk Reduction Through DiversificationRisk Transfer Optimization

TL;DR

Diversification is at the core of insurance and other financial business and is a key issue in the new Solvency II framework for European insurance undertakings. The paper proposes a conceptual framework for a legally enforceable capital and risk transfer that optimally accounts for group diversification benefits. The framework includes a consistent valuation principle compatible with any prior valuation method. The framework is fully flexible and universally applicable, as demonstrated by a simple numerical example illustrating its practicability.

Abstract

Diversification is at the core of insurance and other financial business. It constitutes an important issue in the preparation of the new Solvency II framework for the regulation of European insurance undertakings. In this paper, we propose a conceptual framework for a legally enforceable capital and risk transfer which optimally accounts for the designated group diversification benefits. We also provide a consistent valuation principle which is compatible with any prior valuation method. This makes our framework fully flexible and universally applicable. A first simple numerical example illustrates the practicability of our proposal.