Risk-based capital requirements for property and liability insurers according to different reinsurance strategies and the effect on profitability

A risk theoretical simulation model is here applied in order to assess the default risk for both Property and Liability multi-line insurers along a short-term time horizon. Further, some Risk-Based Capital requirements are analysed according to risk measures as VaR, TVaR, UES and Ruin probability, investigating the impact of either different horizon times and levels of confidence.

Moreover, the effect of different reinsurance strategies on the above mentioned RBC capital requirements is dealt with, also with reference to the profitability of the Insurer through a Risk vs Return trade-off analysis.

The results of the model show how new RBC requirements in non-life business should pay higher attention to the price of reinsurance covers, having not only a favourable strong effect on the risk but also on the expected value of the return, that might increase the total risk of insurer’s insolvency even in a short time horizon. This may be useful in the present debate concerning the new EU capital requirements to be established in the Solvency II phase, and for internal risk modelling evaluating the financial strength of the company.

Keywords: Non-Life Insurance Solvency, Risk-Theory simulation models, Reinsurance strategies, Risk measures, Risk and Profitability trade-off.