Insurance Portfolio Risk Retention

Abstract

In this paper, I introduce a statistic for managing a portfolio of insurance risks. This tool is based on changes in the risk profile when changes in a risk parameter, such as a deductible, coinsurance, or upper policy limit, are made. I refer to the new statistic as a risk measure relative marginal, or RM2, for short, change. By examining data from the Wisconsin Local Government Property Fund, I show how RM2 changes can be used by a policyholder to select an effective risk mitigation strategy. I also show how it can be used by an insurer to identify the "best" and "worst" risks in terms of opportunities for risk management. The RM2 changes reflect the underlying dependence structure of risks; I use an elliptical copula framework to demonstrate the sensitivity of risk mitigation strategy to the dependence structure.