Insurance Portfolio Risk Retention

In this article, 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 change and denote it as RM². By examining data from the Wisconsin Local Government Property Fund, I 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.