Abstract
This contribution deals with the construction of required capital covering the default risk in portfolios with a small number of heterogeneous counterparties. The typical application of this concept is the counterparty default risk of reinsurance in the Solvency II framework.
A special approach to default risk based on the common shock principle is investigated in greater detail. In particular, a numerical study compares results of various methods which are applicable in this context.
The numerical results demonstrate that the suggested modifications of the widely accepted common shock approach implemented within the official Solvency II regulation might be preferred by insurance companies when constructing the portfolio of reinsurers for reinsurance protection of given insurance company. Moreover, it is also confirmed that a single high-quality counterparty is more effective in the context of counterparty default risk than a number of low-quality counterparties.