Capital Consumption: An Alternative Methodology for Pricing Reinsurance

This paper introduces a capital consumption methodology for the price evaluation of reinsurance in a stochastic environment. It differs from the common practice of risk-based capital allocation and release by: (I) evaluating the actual contract cash flows at the scenario level; (ii) eliminating the need for contract-level supporting capital allocation and release; (iii) evaluating each scenario's operating deficits as contingent capital calls on the company capital pool; and (iv) reflecting the expected cost of contingent capital calls as an expense load.