Efficient Risk Allocation within a Non-Life Insurance Group Under Solvency II Regime

16 Pages Posted: 29 Mar 2015 Last revised: 3 Dec 2015

See all articles by Alexandru Vali Asimit

Alexandru Vali Asimit

Cass Business School, City, University of London

Alexandru Badescu

University of Calgary

Steven Haberman

City University London - Faculty of Actuarial Science

Eun-Seok Kim

Queen Mary, University of London

Date Written: March 27, 2015

Abstract

Intra-group transfers are risk management tools that are usually widely used to optimise the risk position of an insurance group. In this paper, it is shown that premium and liability transfers could be optimally made in such a way as to reduce the amount of Technical Provisions and Minimum Capital Requirement for the entire insurance conglomerate. These levels of required capital represent the minimal amount that needs to be held by the insurance group without regulator intervention, according to the Solvency II regulation. We assume that only proportional risk transfers are feasible, since such transfers are not difficult to administer for a large scaled insurance group, as is always the case. In addition, any risk shifting should be made for commercial purposes in order to be considered acceptable by the local regulators that impose restrictions on how much the assets within an insurance group are fungible. Our numerical examples illustrate the efficiency of the optimal proportional risk transfers which can easily be implemented, in terms of computation, in any well-known solver even for an insurance conglomerate with many subsidiaries. We found that our proposed optimal proportional allocations are more beneficial for large insurance group, since the relative reduction in capital requirement tends to be small, whereas the gain in absolute terms is quite significant for large scaled insurance group.

Keywords: Best Estimate; Insurance Group; Minimum Capital Requirement; Risk Margin; Solvency II; Solvency Capital Requirement

JEL Classification: G22, G28

Suggested Citation

Asimit, Alexandru Vali and Badescu, Alexandru and Haberman, Steven and Kim, Eun-Seok, Efficient Risk Allocation within a Non-Life Insurance Group Under Solvency II Regime (March 27, 2015). Insurance: Mathematics and Economics (2016), 66, 69–76 , Available at SSRN: https://ssrn.com/abstract=2586320 or http://dx.doi.org/10.2139/ssrn.2586320

Alexandru Vali Asimit (Contact Author)

Cass Business School, City, University of London ( email )

106 Bunhill Row
London, EC1Y 8TZ
United Kingdom

Alexandru Badescu

University of Calgary ( email )

University of Calgary
Calgary, Alberta
Canada

Steven Haberman

City University London - Faculty of Actuarial Science ( email )

London
United Kingdom

Eun-Seok Kim

Queen Mary, University of London ( email )

Mile End Road
London, London E1 4NS
United Kingdom

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