Reinsurer Risk Loads from Marginal Surplus Requirements [Discussion]

Writing an insurance risk increases the variability of an insurer’s results. This has direct economic costs to the insurer, such as not being able to write other attractive risks or to comfortably maintain the desired degree of risk in its asset portfolio. Extra risk also reduces the value of its future profits in the capital market, that is, its stock price or similar valuation. Insurers require premiums that allow enough expected profit to overcome these costs. This has direct economic costs to the insurer, such as not being able to write other attractive risks or to comfortably maintain the desired degree of risk in its asset portfolio. Extra risk also reduces the value of its future profits in the capital market, that is, its stock price or similar valuation. Insurers require premiums that allow enough expected profit to overcome these costs.