Optimal Risk-Sharing Across a Network of Insurance Companies

Risk transfer is a key risk and capital management tool. Transferring risk between different insurers can be used to mitigate risk. We investigate risk transfer in the context of a network environment of insurance companies. The starting point is an economic view on risk transfer where we consider capital costs and capital constraints at the level of individual insurance companies. In a second step, we demonstrate that the optimisation of profitability across the network can be achieved through risk transfer. Considering only individual insurance companies, there is no unique solution and, a priori, it is not clear which solutions are fair. However, from a network perspective, we derive a unique fair solution in the sense of cooperative game theory. Implications for risk transfer within insurance groups are discussed.