Pricing Multiline Aggregate Excess of Loss with Dependence

Pricing Multiline Aggregate Excess of Loss with Dependence


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Speaker: Nicolas Daxhelet

A multiline aggregate reinsurance contract is a popular reinsurance cover that can be adjusted to the needs of an insurance company. The last decade has seen many European cedants considering and opting for this non-traditional reinsurance cover in order to protect their balance sheet against volatility as well as optimising their capital holding. At a cedant level, the reinsurance structure should be concise and easy for all interested parties to interpret. Traditional reinsurance usually considers lines of business separately on a proportional or non-proportional basis allowing the cedant to be covered against attritional or peak losses.

It is reasonable to assume that all lines of business do not perform in the same way at the same time. However, on a pre-bind basis the interaction between separate treaties is impossible to model, for commercial reasons in particular. A multiline cover could offer the cedant a way to reduce the premium ceded if the reinsurer is in a position to support the underlying insured risks and to quantify the benefit, if any of the diversification of risks. Modelling dependence between risks remains a challenging topic. Below some solutions are offered adopting an Implicit Dependence method based on pairwise relationships.

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