1 Introduction
A detailed motivation for the use of a worst-case approach, based on Knightian uncertainty, for the modeling of stress scenarios is given in [10].This scenario deals with the risk of a reinsurer default. It assumes a situation where the insurer is faced with a large insurance loss. In addition, the economic environment for reinsurers is adverse, leading to their ratings being downgraded. A number of reinsurers default, so that they can no longer (fully) meet their obligations. The primary insurer suffers a loss as a result, which is composed as follows
The reinsurers can no longer cover the reinsured portion of the occurred major loss. Since a number of reinsurers have defaulted, the primary insurer has to buy new cover and pay another premium for it. Reinsurers can only partially settle the primary insurer’s outstanding debts from old claims.