Dynamic Hedging of Reinsurance Counterparty Credit Risk

Professor Rüdiger Frey, WU – Vienna University of Economics and Business. Part of the Probability and Financial Mathematics seminar series.

We study value adjustments and hedging for reinsurance counterparty risk (the risk that a reinsurer is unable to fulfil his contractual obligations towards the insurer).  We propose a novel model that takes contagion effects between the default of the reinsurer and the price of the reinsurance contract into account. To compute the optimal strategy we apply the (local) risk-minimization approach. For this we derive regularity results for backward equations for self-exciting doubly stochastic point processes that are of general interest.