Diversification effect in multivariate optimal risk transfer

doi:10.1016/j.insmatheco.2025.103156

Diversification effect in multivariate optimal risk transfer

2025-09-01

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DOI：10.1016/j.insmatheco.2025.103156

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There are two main practical questions in the context of multivariate risk transfers. First, non-intragroup risk transfers raise the question of whether to purchase (re)insurance coverage for the aggregate risk or separately for each risk. Second, intragroup risk transfers are always challenged by regulators on whether there is a commercial purpose in such transactions, and therefore, insurance buyers must commercially validate their decisions. This paper investigates the diversification effect from the buyer's and the seller's perspectives. Our analysis for insurance buyers is based on the ratio between the optimal reinsurance risk margin cost for the total sum of losses and the sum of the individual optimal risk margin costs for each loss type. Because analytical comparison is infeasible, we develop a statistical inference method for this ratio and evaluate its finite sample performance through simulation. The seller's perspective is modeled via a new measure to assess the relative profitability of offering joint versus separate risk transfer contracts. The combined use of these measures enables both buyers and sellers to identify optimal risk transfer decisions that are commercially viable for both parties. Finally, we apply the proposed inference methods to the widely studied Danish fire loss dataset, illustrating the practical implications of our findings that equally apply to an intragroup or non-intragroup risk transfer.

Keywords:

Diversification

Optimal insurance

Risk transfer

Statistical inference

Diversification effect in multivariate optimal risk transfer

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