Asset and Liability Management in Financial Institutions: Essays on Risk Management, Reinsurance and Alternative Risk Transfer

This thesis analyzes the risk transfer of non-life insurers in the presence of counterparty risk regarding four aspects: risk and profitability, optimal risk transfer, portfolio effects, and organizational risk culture as a prerequisite for a holistic risk management. First, we investigate how counterparty risk influences the basis risk of an industry loss warranty (ILW), while taking into account the impact of counterparty risk on an insurer’s risk and profitability situation when entering a reinsurance contract or an ILW. The analysis includes non-linear dependence structures, different levels of collateralization as a risk management measure, and higher transaction costs for reinsurance. Our results emphasize the relevance of considering counterparty risk related to basis risk as well as concerning insurers’ overall risk and profitability situation. Second, optimal risk transfer in the presence of counterparty risk is examined in a shareholder value maximization setting, when an insurer can jointly enter a default-risky reinsurance contract and ILW, while needing to maintain a predetermined ruin probability. We show that the neglection of counterparty risk leads to an implicit risk transfer to policyholders, potentially in conflict with regulatory stipulations. A higher sensitivity of policyholders to the insurer’s default risk may increase the optimal risk transfer. Moreover, the availability of collateral can impact the demand for risk transfer. Third, portfolio effects related to the optimal risk transfer decision under counterparty risk are studied, when a non-life insurer can combine three types of reinsurance contracts and an ILW. Different default risk sensitivities of policyholders for non-catastrophic and catastrophic insurance are also accounted for. It is shown that lower counterparty risk correlations often raise an insurer’s shareholder value. This especially applies to higher risk transfer layers as well as in case of a lower correlation between counterparty risk and the losses in the insurance industry. Finally, we perform a structured literature review on the concept of organizational risk culture, which is not uniquely defined to date. Based on the development of an overarching definition, we derive common dimensions, related assessment methods as well as improvement levers. In a further step, we provide an overview on evidence regarding the value relevance of organizational risk culture in and beyond the financial industry. Thereafter, we outline avenues for future research, with the topic of organizational risk culture currently being only scarcely addressed in the insurance context.