1. Why using a stochastic model

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RORAC : Return On Risk Adjusted Capital • There are different definitions of capital: – Capital required by the Regulator to be able to pursue an insurance activity – Capital required by the rating agencies to obtain a certain rating – Capital based on the risk taken by the insurer, the Risk based Capital. • We will use this Risk based capital to advice on the most optimal reinsurance structure • Example: Risk based capital = VAR at 0.5% probability • RORAC = Average result / Risk based capital needed • Remark: with Solvency II, risk based capital and capital required by the regulator are getting closer 39
Introducing the concept of Ceded ROE (Return On Equity) Risk transfer at a cost below the internal CoC creates value Scale Value Results Return on Capital Capital Allocation of Capital 4. How much value created 3. Cost of ceded RoE 2. How much capital released Risks Reinsurance / Risk Transfer <strong>1.</strong> How much volatility transferred • Ceded ROE = Mean cost of reinsurance net of tax Decrease of capital due to reinsurance Where: • Mean cost of reinsurance net of tax = (Reinsurance premium + Mean reinstatement premiums – mean of commissions – mean recoveries) × (1- tax on corporate dividends) • Capital in this case is defined as the risk based capital
Page 1 and 2: Using Stochastic model for choosing
Page 3 and 4: Principle of insurance is to reduce
Page 5 and 6: Recoveries Premium received Paid lo
Page 7 and 8: Approximation of the distribution f
Page 9 and 10: Stochastic modeling when we are not
Page 11 and 12: ReMetrica DFA Simulation MEAN = $30
Page 13 and 14: ReMetrica DFA Simulation MEAN = $30
Page 15 and 16: Our Example to be modelled • Port
Page 17 and 18: What is a surplus • The proportio
Page 19 and 20: Windstorm • Typical features: - L
Page 21 and 22: Flood • Typical feature - Flood p
Page 23 and 24: Hazard Example Digital terrain mode
Page 25 and 26: loss Output from Natural Catastroph
Page 27 and 28: Other method: Exposure rating that
Page 29 and 30: Using the software ReMetrica, used
Page 31 and 32: Measure for profitability • Avera
Page 33 and 34: What is a good risk measure • A r
Page 35 and 36: VAR Value At Risk • Only uses one
Page 37 and 38: loss Do not think that the choice o
Page 39: Outline of the presentation 1. Why
Page 43 and 44: Creation of value • Shareholders
Page 45 and 46: Conclusion Stochastic modeling is a

1. Why using a stochastic model

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