Reinsurance Credit Risk: A Market-Consistent Paradigm for Quantifying the Cost of Risk

Property-casualty insurance companies tend to buy reinsurance; when they do, they must address reinsurance credit risk. This paper advocates that companies should evaluate reinsurance credit risk with a market-consistent paradigm, which mani-fests two salient features: a probabilistic view of credit risk that assigns costs to low probability events, and a willingness to use market-based instruments for the purpose of quantifying the cost of risk. The proposed market-consistent paradigm facilitates a company’s ability and willingness to measure, hedge, and optimize reinsurance credit risk.

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