Mortality risks, reinsurance and risk-based supervision

Abstract

Under risk-based supervision, mortality risks are generally considered proportional to the number of insured lives (N). This assumption is, however, incorrect for volatility mortality risks (this being the key justification for life insurance), as this risk is proportional to √N. The main benefits of reinsurance are consequently not properly reflected in the risk-based capital requirements under risk-based supervision Pillar 1. Similar findings apply to unexpired risks, also called ‘premium risks’, in non-life insurance. In this article, volatility risks shall therefore be thoroughly considered in the formulation and assessment of the insurer’s reinsurance policy, i.e., under risk-based supervision Pillar 2.

Keywords: Risk-based supervision; mortality risks; volatility; minimum capital requirements; normal power approximation; reinsurance