Political Risk Reinsurance Pricing - A Capital Market Approach

The need for reinsurance capacity in Political Risk is higher than it has been in a decade. However, more and more reinsurers are either restricting the coverage or entirely leaving the practice. This paper proposes an objective reinsurance pricing methodology to assess the risk of writing a large political risk reinsurance portfolio based on country risk ratings, sovereign ceilings, political risk default rates and severity assumptions based on historical data. The paper also incorporates a mechanism to indicate the effects of regional and trade correlations based on the advanced credit modeling.