Development of Economic Capital Using Value-at-Risk (VaR) for Catastrophe (Re)Insurance

Abstract

Effective risk management requires robust risk quantification by integrating a company’s aggregate risk exposures. This approach strengthens risk awareness and informs mitigation strategies for stakeholders. This study explores economic capital as a framework for assessing risk-based capital requirements, specifically focusing on catastrophe risk in (re)insurance firms. The proposed risk quantification framework utilizes the Value-at-Risk (VaR) methodology to statistically estimate potential losses at predetermined confidence intervals. To address the inherent complexity of catastrophe risks, the model incorporates sophisticated distribution modeling and stochastic simulation techniques. These advanced analytical approaches are implemented through specialized catastrophe modeling platforms to optimize capital adequacy evaluations. This framework ensures financial resilience against extreme stress scenarios by implementing VaR at a predetermined threshold. The findings support management in optimizing capital allocation, risk controls, and mitigation strategies while balancing profitability and risk exposure.