Portfolio modelling of counterparty reinsurance default risk
Modelling counterparty default risk of a reinsurance bouquet requires an appropriate underlying default correlation structure. A flexible model with two control parameters gives us an alternative of the current standard model in Solvency II
We treat the bouquet of reinsurance treaties and the induced counterparty default risk for a primary insurer as similar to an investment portfolio. Contrary to traditional mean-variance portfolio design, which implies a large number of realisations of random variables and comparable sized components, reinsurance default risk typically is a rare event process with potential large severity
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