Understanding and Monitoring Reinsurance Counterparty Risk

Mathieu Gatumel (1) , Sabine Lemoyne de Forges (2)

1 IREGE - Institut de Recherche en Gestion et en Economie
2 X - École polytechnique

We introduce a new measure of risk appetite in financial markets, based on the cross sectional behavior of excess returns. Turning them into probabilities through a Markov Switching model, we define one global risk appetite measure as the cross-sectional average of the individual probabilities for each asset to be in a "risk appetite" regime. Given the probabilistic approach that comes naturally with this Markov Switching framework, we present various tests to gauge the interest of the risk appetite measure that is presented here. Using these tests we show that our index behaves well vs. various competitors, especially in out-of-sample results. We test for the information content of various assets and find that a core of asset allocation-related assets provide the best possible choice over various competing specifications.

Keywords: Reinsurance Counterparty Risk; Solvency; Market Discipline; Regulation

Domains: Business administration

Mathieu Gatumel, Sabine Lemoyne de Forges. Understanding and Monitoring Reinsurance Counterparty Risk. Bulletin Français d'Actuariat, 2013, 13 (26), pp.121-138. ⟨hal-00946934⟩